Remember when Amazon.com, Inc. (NASDAQ:AMZN) catalyzed the retail apocalypse? Remember when they raised eyebrows during that stretch when they built their own physical book stores? Better yet, remember when they shocked the world by acquiring Whole Foods Market, a physical grocer that didn’t seem to fit Amazon’s digital retail model?

Believe it or not, there is actually a plan behind all this madness. Essentially, all Amazon wants to do is make Amazon Prime as attractive as possible so as to get as many Amazon Prime members as possible.

Why is this the big plan? Because Amazon Prime is the profit driver, and the major catalyst for AMZN stock. All the retail operations are just break-even tools used to boost the Amazon Prime value proposition.

The latest move in this big plan involves the now defunct Toys R Us. The huge toy retailer, which will be extinct in the U.S. come this holiday season, has left a huge hole in the toy retail world. Amazon is looking to fill that hole. Not because the toy business is that attractive, but because toy stores give the company yet another opportunity to boost the Prime value proposition.

Ultimately, this boosting of the Prime value proposition will drive AMZN stock materially higher in the long run.

Here’s a deeper look.

Amazon Will Make A Really Cool & Relevant Toy Store

Rumors are presently circulating that Amazon will launch a print toy catalog this holiday season. The catalog will look very similar to the “Big Book” holiday toy catalog which Toys R Us has circulated for several years now.

These rumors follow earlier rumors that Amazon was looking to acquire some now-empty Toys R Us real estate. Together, these two rumors paint the picture that Amazon is trying to make a new and improved Toys R Us.

I think that is exactly what Amazon is doing. Toys R Us reported $6.5 billion in sales last year, so this isn’t a small market. Moreover, Amazon can do toys better than anyone because they have the biggest consumer dataset in the world, so they know exactly which toys are popular among which demographic and why. Also, they are a tech company, so their toy stores will likely be new, fresh and exciting.

All together, Amazon has the potential to create tech-infused toy stores with a highly relevant, highly optimized toy product offerings and an efficient operating model which cuts out unnecessary costs. That should allow Amazon to succeed where Toys R Us failed, much like how Amazon book stores succeeded where traditional book stores failed.

Amazon Prime Has Huge Growth Potential

Although Amazon’s future toy stores will likely be cool and successful, that really isn’t the big growth story. Amazon doesn’t reasonably project to make a whole bunch of money from its toy business.

Instead, the big money driver here is Amazon Prime.

The only reason Amazon wants to get into the brick-and-mortar toy business, and arguably the only reason the company acquired Whole Foods and built its own book stores, is to increase the value proposition of Amazon Prime.

The logic is pretty straightforward: The more retail operations Amazon has in its ecosystem, the larger Amazon Prime’s value proposition. The larger Amazon Prime’s value propositions, the more Amazon Prime members Amazon has. And the more Amazon Prime members Amazon has, the higher profits go, since Prime is a high-margin revenue stream.

The higher profits go, the higher AMZN stock goes.

From this perspective, Amazon’s long-term growth strategy is also quite simple:

• Create a bunch of loosely connected retail operations, both digital and physical.
• Run those operations on razor-thin margins so that they have better prices than the competition.
• Restrict low-price and perks benefits to Prime members, thereby forcing adoption rates higher for Prime.
• Grow Amazon Prime membership base.

Lather. Rinse. Repeat.

The net result, several years down the road, will be that Amazon runs book stores, toy stores, grocery markets, convenience stores, movie theaters — so on and so forth. Amazon won’t make much profit from those operations, but because they will have lower prices reserved for Prime members, the Prime membership base will grow immensely.

Because Prime is the big profit driver, immense Prime growth will lead to immense profit growth and that will, in turn, power AMZN stock higher.

Bottom Line on AMZN Stock

When it comes to Amazon, it’s all about Prime. Everything the company does on the retail side is to increase Prime benefits and adoption rates because Prime is where the company makes all its money.

Right now, this is working. The addition of Whole Foods and book stores has caused a huge jump in the Prime membership base and profits are skyrocketing. The next addition will be toy stores and, thereafter, Amazon will likely make a jump into cosmetics, convenience stores, movie theaters, so on and so forth. Each of these retail adds will push Prime adoption rates and overall profits higher.

Inevitably, this will lead to AMZN stock trending higher.

As of this writing, Luke Lango was long AMZN.