Shares of Amazon.com (NASDAQ: AMZN) are solidly higher Thursday (+3.36%) following bullish commentary from Morgan Stanley analyst Katy Huberty. The analyst sees the company entering an era of margin expansion, which investors welcome given the volatility, and mostly lack of profits over the years.

"After digesting 4Q14 results / management commentary and meeting with Amazon IR, we are increasingly convinced Amazon is entering a phase of improving profitability," Huberty said.

The analyst said 2015 is bringing with it an increased focus on productivity. "Amazon is putting increased importance on process improvement and productivity in its 2015 planning process which is wrapping up now," she said. "We see this as a function of focusing investment dollar growth on big opportunities – including AWS, fulfillment, and original content – while perhaps slowing the growth of or re-focusing investments in areas like China (the company constantly evaluates its strategy), brick and mortar (largely used to increase convenience with delivery options like Locker), and Fresh (expanding but slowly). As a result, we see the company returning to a pattern of beating the top-end of CSOI guidance which it did in 8 of the last 10 quarters."

The analyst also said improved disclosures help investors better understand business trends, and increase management accountability for key strategies and investments. The analyst notes new disclosures include: 1) breaking out AWS as a third segment (historical data on revenue and profitability expected before April earnings), 2) Prime sub growth (50% in the US / 53% globally during 2014 despite price increase), 3) FBA as a percent of third-party units (>40%), 4) FCF metric that adjusts for capital (largely for IT equipment purchases) and finance leases.

Huberty said AWS disclosure and potential margin improvement increase likelihood of bull case. "Amazon is encouraged by returns in highly utilized AWS data centers, and initiatives to further increase efficiency suggest margins can improve over time. We also expect industry pricing to more closely follow Moore’s Law going forward as opposed to the more extreme price cuts in early 2014. Benefits of cloud extend beyond price including the ability to handle peak volumes, quickly ramp new apps, move compute closer to customers, and share costs such as security across many customers. This combined with accelerating growth (43% revenue, 90% usage growth in 4Q14) and improved disclosure support our bull case view of investors attributing specific value to AWS – which we estimate at 4.4x EV/Sales based on cloud comps, or $75/share. While AWS benefits from engineering talent and the quick feedback loop of Amazon’s eCommerce business, our view is that it doesn’t, in itself, prevent a potential spin of the business when profitability improves which could further unlock value of this asset. That said, Amazon has publicly indicated that it has no plans to spin the business at this time."

The analyst also noted: eCommerce margins improving on 3P and fulfillment scale; Increased selection key to replicating Prime success in international markets; Large, emerging markets remain important to long-term growth but we see a more focused investment approach in China...; Expect a measured Fresh roll-out; Brick and mortar investment largely for convenience (pick-up / lockers) rather than storefront expansion.

The firm reiterated an Overweight rating price target of $415. They have a bull case of $490 if the company can sustains revenue growth of 20%+ through 2017. On the bear side they have a bear case of $225, which assumes aggressive investments continue in 2015 and pressures margins.

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