Key Takeaways
- Amazon’s primary profit drivers, AWS and Advertising, are exhibiting accelerating growth and margin expansion, providing a powerful counterbalance to the lower-margin retail operation.
- The stock’s valuation has matured from a pure growth narrative to a more defensible GARP (Growth at a Reasonable Price) profile, anchored by surging free cash flow rather than just revenue multiples.
- While market momentum provides a tailwind, significant headwinds persist, including a formidable FTC antitrust lawsuit and intense competition in e-commerce from new, aggressive players.
- The next significant re-rating for Amazon may not come from its individual segments, but from the market appreciating the compounding efficiencies of AI integrated across its entire business ecosystem.
As the S&P 500 pushes into new territory, the gravitational pull on its largest constituents becomes a matter of intense focus. For Amazon, the question is not simply whether it will follow the market higher, but whether its underlying operational improvements can justify a valuation that leaves its peers behind. The narrative is shifting from a company defined by top-line growth at any cost to a more disciplined machine geared for operational leverage and substantial free cash flow generation, a transition the market appears to be only gradually pricing in.
Deconstructing the Fundamental Picture
Recent commentary, such as that from analyst TheLongInvest, points towards Amazon’s fundamental strength as the primary catalyst for its next move higher. This view is not without merit, but the specifics are more nuanced than a simple “strong fundamentals” tagline. The company’s financial structure is increasingly a tale of two very different businesses operating under one roof: the high-growth, high-margin engines of Amazon Web Services (AWS) and Advertising, and the vast but operationally intensive retail segment.
The first quarter of 2024 illuminated this dynamic clearly. AWS saw its revenue growth accelerate to 17% year over year, reaching a formidable $25 billion for the quarter. More importantly, its operating income surged by 84% to $9.4 billion, underscoring its immense profitability and its role as the financial bedrock of the entire company. 1 Similarly, the advertising segment grew by 24% to $11.8 billion, a high-margin revenue stream that leverages the company’s colossal e-commerce footprint without the associated logistical headaches. These two divisions are no longer just promising side projects; they are the core profit centres.
| Segment (Q1 2024) | Revenue | Year-Over-Year Growth | Operating Income / (Loss) |
|---|---|---|---|
| Amazon Web Services (AWS) | $25.0 billion | 17% | $9.4 billion |
| North America Retail | $86.3 billion | 12% | $5.0 billion |
| International Retail | $31.9 billion | 10% | $0.9 billion |
Source: Amazon Q1 2024 Earnings Release. Note: Advertising revenue is reported within segment results.
The Retail Turnaround
The most underappreciated part of the story may be the quiet turnaround in the retail business. For years, investors tolerated meagre to negative retail margins as a necessary cost of acquiring market share. Yet, a concerted effort to regionalise its fulfilment network and optimise its cost-to-serve is now bearing fruit. The North America segment posted a $5 billion operating profit in the first quarter, a stark reversal from the losses seen just a couple of years prior. This suggests a business that is finally maturing towards sustainable profitability, a development that makes the overall investment case significantly more robust.
A Reassessment of Valuation
Amazon’s historical valuation has often been a sticking point for more conservative investors, with its price-to-earnings ratio frequently venturing into territory that seemed, to put it politely, aspirational. However, this has changed. The forward P/E ratio has compressed considerably, and with earnings projected to grow robustly, the stock now screens more favourably against its mega-cap technology peers.2
More pertinently for a company with such heavy capital expenditure, its generation of free cash flow (FCF) has become a primary valuation anchor. Over the trailing twelve months, Amazon generated over $50 billion in free cash flow, a remarkable recovery from the negative figures posted during its peak investment cycle in 2021 and 2022.1 For institutional investors, this shift towards strong FCF conversion is arguably the single most important factor, as it signals a company with the financial firepower to invest in future growth, reward shareholders, and weather economic downturns without undue stress.
Headwinds That Cannot Be Ignored
Despite the positive operational momentum, the path is not without obstacles. The most significant is the ongoing antitrust lawsuit brought by the U.S. Federal Trade Commission (FTC). The suit alleges that Amazon uses its monopoly power to inflate prices and stifle competition in its marketplace.3 While the market has seemingly shrugged off this risk, an adverse ruling that forces structural changes, such as the separation of its first-party retail business from its third-party marketplace, would represent a fundamental threat to its business model. Such an outcome remains a low probability event, but its potential impact is enormous.
On the competitive front, while AWS maintains its lead in cloud computing, the e-commerce landscape is being reshaped by ultra-low-cost competitors like Shein and Temu. These platforms are capturing a meaningful slice of consumer attention and disposable income, particularly in apparel and household goods. While they do not compete directly with most of Amazon’s core categories, their influence on consumer price sensitivity and expectations could create margin pressure at the edges of Amazon’s retail empire.
A Concluding Hypothesis
The consensus bull case for Amazon rests on continued growth in AWS, margin expansion in retail, and the high-profit contribution from advertising. This makes targets like the $234 level mentioned by some observers seem entirely plausible, assuming the broader market environment remains constructive.4
However, a more speculative, and perhaps more powerful, thesis is that the market is still failing to correctly price the compounding effect of artificial intelligence across Amazon’s entire ecosystem. We are not just talking about AI services sold through AWS. The real alpha could be generated by deploying advanced AI to create a hyper-efficient feedback loop between its segments: optimising logistics and inventory in retail with a precision that is currently unattainable, dynamically personalising advertising to a degree that dramatically increases conversion rates, and using the data from both to inform new product development at AWS. The market currently values Amazon as a sum of its parts; the next re-rating will likely occur when it begins to value it as a truly integrated, AI-driven flywheel.
References
1. Amazon. (2024, April 30). Amazon.com Announces First Quarter Results. Amazon Investor Relations. Retrieved from https://ir.aboutamazon.com/news-release/news-release-details/2024/Amazon.com-Announces-First-Quarter-Results/default.aspx
2. Seeking Alpha. (2024). Amazon: What The Stock Needs To Break Out. Retrieved from https://seekingalpha.com/article/4799242-amazon-what-stock-needs-to-break-out
3. Fung, B., & Duffy, C. (2023, September 26). FTC and 17 states sue Amazon in landmark antitrust case that could break up the company. CNN Business. Retrieved from https://edition.cnn.com/2023/09/26/tech/amazon-ftc-antitrust-lawsuit/index.html
4. TheLongInvest [@TheLongInvest]. (2024, July 11). With the US Market making new All Time Highs It’s hard to see how $AMZN does not follow Easily the strongest Mega Cap in terms of Fundamentals $234 looks inevitable next first [Post]. Retrieved from https://x.com/TheLongInvest/status/1813233015414685753
5. LiteFinance. (n.d.). Amazon (AMZN) Stock Price Prediction. Retrieved from https://www.litefinance.org/blog/analysts-opinions/amazon-price-prediction-forecast/
