Amazon stock is now up 38% since the company reported its 4Q results on January 29th. What has happened that has caused investors to re-evaluate Amazon's value? 

Amazon Web Services is More Profitable than Many Imagined

Amazon is made up of two separate businesses that professional investors value separately. The first business is Amazon Web Services, which provides cloud computing services to businesses. Previously, many investors estimated that this business was generating a loss given Amazon's heavy price cuts in the space, with some estimates assuming a -20% operating margin for the segment. Amazon broke out financials for the segment during 1Q15, revealing a business growing revenue at ~50% with +14% operating margins in 2014. With significantly more profitability, expected revenue acceleration in 2015, and a margin profile that is expected to improve over time as they gain scale, investors were excited by the business model and increased their estimates on AWS's value. 

Amazon Retail is Moving in the Right Direction

The second piece of Amazon's business is their retail operations. Amazon profitability on this end is also moving in the right direction after a heavy year of investments in 2014. Recall that during the company's 4Q14 earnings, Amazon operating margins stopped declining after three quarters of contraction. Importantly, management noted that they would be increasingly focused on profitability moving forward. While their results were encouraging, many investors remained skeptical. In 1Q15, Amazon's results showed a gradual improvement, further supporting management's commentary. 

Despite the improving trend, an important caveat is that the current profitability level for retail was lower than expected. While this offsets some of the optimism around the higher AWS profitability, it's also important to note that AWS is a higher multiple business, and therefore results in a higher contribution to overall valuation.

Estimates Moving Up, Sum of the Parts Valuation Adjusting

As a result of these developments, investors are re-evaluating the Amazon business. On the retail side, profitability is moving in the right direction, driving earnings estimate revisions. On the AWS side, valuation is also  moving higher as recent disclosures revealed a more profitable-than-expected business (with some valuation estimates for AWS increasing from roughly ~$40 billion to ~$60 billion).  Net net, we're left with Amazon now hovering around $430 compared to its $300 levels at the start of the year.