With Amazon's annual Prime Day right around the corner, we thought we'd take a look at what this event reveals about the company's longer-term strategic priorities and how it supports the assumptions behind our US$2300 fair value estimate.

As a starting point, we believe Amazon has been undergoing a strategic shift the past several years on two fronts.

The first is shifting away from a first-party marketplace where Amazon directly sells products to consumers, to more of a third-party platform where vendors sell products and Amazon takes a commission from the sale. This is important not only because this is a higher-margin transaction from Amazon, but also it unlocks additional services that Amazon can offer its vendors.

The most obvious of these is Fulfillment by Amazon, where vendors can store their products alongside Amazon's own products and use the company's logistics services for one- and two-day delivery. However, this also includes Amazon's own advertising services, which was one of the fastest-growing segments across Amazon's portfolio in 2018.

As it pertains to Prime Day, Amazon is planning new collaborations with several new key apparel vendors and has noted that small- and medium-sized vendors sold more than US$1.5 billion worth of products on Prime Day last year, a figure that we expect the company to easily surpass in 2019.

The second notable strategic shift is the move away from Prime member acquisition and toward Prime member engagement. With close to 90 million estimated Prime memberships in the US across almost 75 million households, we believe Amazon is bumping up against the natural limit for the number of basic Prime memberships it can offer in the US. This means that Amazon must now get a greater engagement out of existing members, and not just having members buy more frequently across more categories, but instead adopting Amazon's expanding portfolio of subscription and other services. Several of the earliest announced deals for Prime Day revolved around subscription services like Amazon Music, Twitch Prime, and Audible, which we think will have a positive impact on longer-term profitability. Another way to think about this is that over the next few years, many Amazon Prime members will be paying much more than the US$120 base price, but perhaps as much as US$200-US$300 a year for their membership. We also believe that this explains Amazon's recent moves in grocery, beauty, and healthcare, each of which offer potential subscription services.

Taken together, the ongoing shift to a third-party marketplace and the move to more subscription services supports our five year targets, which includes mid-to-high teen annual top-line growth and operating margins pushing 10 per cent from 5.3 per cent last year.