Amazon stock (NASDAQ: AMZN) has fared well this year, rising by over 30% so far. At its current market of just under $200, the stock is trading roughly 5% below its fair value of $210 – the Trefis estimate for Amazon’s valuation. In this analysis, we take a look at some of the potential opportunities and risks for Amazon, helping investors decide whether to buy, hold, or sell the stock.
Amazon has spent years building out its vast empire, investing heavily in data centers, e-commerce infrastructure, and logistics. Investors too have had to be patient, watching as the company scaled up, at the expense of near-term profits. Now, it’s remarkable to see Jeff Bezos’s vision unfold, as these long-term investments appear to be finally paying off. Amazon’s profitability is improving as it capitalizes on fast-growing areas like generative artificial intelligence which have driven the expansion of Amazon Web Services. Rising digital ad sales and improved cost management are also boosting margins.
However, the stock is up by almost 2x in the last two years, suggesting that some of the positives are likely priced in. Notably, returns for Amazon stock have been more volatile than the S&P 500 at 2% in 2021, -50% in 2022, and 81% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Things Amazon Has Gotten Right
Infrastructure investments are paying off
Amazon has spent years doing a lot of heavy lifting: building out both cloud and e-commerce infrastructure. And these big bets are finally paying off. For instance, Amazon saw its operating profits for the last quarter surge 55% year-over-year to $17.4 billion – significantly exceeding the upper end of its guidance of $15 billion. Amazon’s massive fulfillment centers and delivery systems are difficult for competitors to match – giving the company a distinct edge in speed and lower operating costs. Additionally, Amazon has been able to better lock in customers via perks like Prime offerings, free shipping, and Prime Video. These investments can take years for competitors to replicate, creating a moat around Amazon’s business, which is increasingly visible in its expanding margins.
Amazon is also more confident about its value proposition and pricing strategies. Both North American and international retail operations saw improved margins, led by better cost management, tweaks in seller policies, and higher fees. This is particularly impressive given that the retail environment has softened in recent months amid a mixed economy.
Advertising expansion
Amazon is also growing rapidly in the advertising space, emerging as a go-to platform for marketers targeting potential buyers. Its digital advertising segment generated $14.3 billion in revenue – a 19% year-over-year increase – accounting for 9% of total revenue over the last quarter. Although Amazon doesn’t disclose profitability for this business, advertising tends to be highly lucrative. Amazon ads have an edge because users on its platform are often actively shopping, making ads more likely to convert into sales compared to, say, Google, which caters to a more generic search audience. Additionally, Amazon’s superior shopping and customer browsing data might allow for better ad targeting. The integration of ads into Amazon’s marketplace also makes it easier for users to purchase products without leaving its platform.
Valuation is looking more realistic
Amazon stock is increasingly seen as a reasonable value. While the company has historically traded at negative or triple-digit price-to-earnings ratios, its valuation metrics are improving. The company’s stock currently stands at around 42x 2024 earnings and about 34x 2025 consensus earnings.
Although revenue growth may slow, Amazon’s margins are clearly on an upward trajectory. While Amazon is expected to boost its capital spending to a total of $75 billion this year (up from about $48 billion last year) it will primarily support technology infrastructure to meet rising artificial intelligence demand. This focus on higher-return investments in technology rather than lower-return e-commerce infrastructure could also drive margins going forward.
Additionally, Amazon has implemented effective cost management strategies, adopting a more measured hiring pace and enhancing operational efficiency. Notably, AWS, Amazon’s cloud division, reported an operating income of $10.4 billion, a remarkable 50% increase year-over-year, significantly outpacing revenue growth of 19%.
Things That Could Hurt Amazon In The Near Future
AWS
Amazon’s AWS remains the company’s biggest profit driver, accounting for over 70% of total operating income over the first nine months of this year. However, we see a couple of threats to the cloud business at this point. Microsoft Azure and Google could gain an edge in the AI race. Microsoft has made substantial investments in AI, including its deep partnership with OpenAI, which is likely to bolster its Azure cloud services. Similarly, Google Cloud’s generative AI offerings could also find favor as the company expands its services. The customer lock-in with AWS may decrease due to the rise of options like containerization, which makes it easier to transfer a company’s entire tech stack between providers. This makes it easy for companies to switch cloud providers – reducing their reliance on a single provider. The rising portability and standardization of services could make cloud computing even more commoditized, meaning that companies like Amazon could see pricing and margins squeezed, while potentially being forced to make more capital investments Both Azure and Google Cloud saw their growth pick up in Q3, AWS growth remained steady at 19%, flat versus Q2.
E-commerce competition on multiple fronts
Amazon’s e-commerce business faces challenges. Chinese companies such as Temu and Alibaba are competing directly with Amazon offering products at bargain prices shipped directly from China, and finding increasing favor with customers in the U.S. and overseas. Prices are cheap, the product options are massive, and shipping times are getting faster. Old-school retail players including Walmart Costco and Target Corporation have also invested considerably into their digital strategies and omnichannel offerings – integrating customer experience across channels, including physical stores, online platforms, and apps. Specialty retail players such as Best Buy are also getting more competitive with prices, offering price matching and aggressive discounts. This could be an issue for Amazon, given that the e-commerce business still accounts for over 80% of its total revenues.
Regulatory issues in the U.S. and abroad
While Google has been the most prominent target in the current regulatory crackdown on major tech companies, Amazon is also grappling with legal challenges of its own. In a major lawsuit filed last year, the Federal Trade Commission and 18 states accused Amazon of abusing its market dominance to inflate prices, overcharge sellers, and stifle competition. This legal battle, one of the largest in Amazon’s history, is set to go to trial in October 2026. Beyond the U.S., Amazon is facing regulatory hurdles overseas as well. Earlier this year, the company was forced to abandon its planned acquisition of robot vacuum maker iRobot after the European Union raised objections, further highlighting the increasing global scrutiny of Amazon’s business practices.
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