Doing a Great Job, But Priced About Right

All figures in US dollars. Amazon reports in USD; the tear sheet shows earnings per share in cents (717 = $7.17).

Amazon operates across three reporting segments: North America and International (the retail, marketplace, subscription and advertising businesses) and Amazon Web Services (AWS) (global cloud computing — compute, storage, database and increasingly artificial intelligence services).

The crucial point for investors is that these segments have very different economics. The retail business generates the overwhelming majority of revenue but operates on thin margins. AWS generates a much smaller share of revenue but the overwhelming majority of profit. So while Amazon looks like a retailer by turnover, it behaves like a high-margin cloud-and-advertising company by profit.

In recent times, Amazon's turnover growth has been fairly lacklustre — 9.4% in FY 2022, 11.8% in FY 2023, 11.0% in FY 2024, and 12.4% in FY 2025. Not huge rises in revenue growth. But at the same time, they have seen gross margins rise quite consistently, hitting 50.3% in FY 2025. You can really see the potential here: Amazon is a fully maturing tech company that is managing to consolidate its position into higher levels of stability.

Six-year financial history ($m unless stated)

They haven't seen significant changes in their shares in issue. But if you look at the last two years, earnings per share has grown by approximately 57% on average, and over the last five years it has grown by approximately 28% on average year on year. The FY 2022 loss was the exception — driven by a write-down on the Rivian investment and one-off cost pressures — but the trajectory since has been strongly upward.

This is the heart of the Amazon story. The full-year FY 2025 breakdown shows just how lopsided the profit contribution is:

Segment revenue and operating income (FY 2025)

The AWS revenue in Q1 rose by 28% to $37.6 billion — its fastest growing rate in fifteen quarters. It remains Amazon's most profitable division, and seems to be benefiting directly from AI demand as enterprises build and run AI workloads on Amazon's infrastructure.

Interestingly, Amazon's advertising business generated $17.2 billion in Q1 and now runs annually at around $70 billion, with growth of approximately 22% year on year. Very impressive — and another high-margin revenue stream that flatters the group's profit profile.

High-growth divisions (Q1 snapshot)

My general belief is that Amazon is doing a lot of investment in AI infrastructure and AWS expansion, which is obviously costing a lot of money. We are seeing very strong growth figures coming out for them, profit-wise anyway, and those areas are growing revenue-wise too. It's probably more the retail side of the business that is not growing so much.

Capital expenditure history

What I've done with my valuation of Amazon is take the current earnings per share of $7.17, a valuation multiple of 9x, and continue with their historic growth rate — I'm giving it a 28.5% earnings per share growth rate into the long term. That seems very high, but they're achieving improvements in earnings per share over quite an elongated period, and as a major tech company they seem to be at the forefront of AI movements.

In a slightly different way to Alphabet, Meta, or Nvidia, Amazon has its own offerings — they're not all fighting in exactly the same space. I'm quite impressed with their general growth figures, and I think improvements in AI are likely to help their bottom line — in AWS infrastructure, in potential new products, and even on the retail side through better automation and robotics. As a result, I'm giving it a positive uplift of 8%, as I think they're likely to come out with some bumper figures in the coming year.

VALUATION SNAPSHOT

This gives a total valuation of $248.45 a share and a value opportunity of −4.9%. That is roughly speaking fair value, so I'm giving it a proposed action of Hold, even though it's slightly negative. As always with some of these US tech companies, the margins are pretty small as to fair value — and −4.9% is basically fair value.

• Capex burden: Capital expenditure has gone from around $40 billion to roughly $132 billion in five years, with FY 2026 expected materially higher. If the AI returns don't materialise, this is an enormous drag on free cash flow.
• Valuation: At ~36x trailing earnings, the stock prices in a lot of future growth. The 28.5% growth assumption is high — any slowdown would make the current price look expensive.
• Retail growth stalling: The retail side is "not growing so much." With margins thin there, the group increasingly depends on AWS and advertising to drive profit.
• AWS competition: Microsoft Azure and Google Cloud are formidable competitors. Any loss of AWS momentum or pricing power would hit the profit engine directly.
• Share-price volatility: The stock saw a sudden ~13% drop in February at the onset of the Iranian conflict. These swings create risk — but also opportunity.

• Short-term share-price weakness: Should the price fall for short-term reasons — as it did in February — it could present a clear buying opportunity for a longer-term trade.
• AWS re-acceleration sustained: If AWS holds growth above 25%, the profit engine would justify a higher valuation and a buy rather than a hold.
• Evidence of capex payoff: Clear demonstration that the AI infrastructure spend is generating incremental high-margin revenue would support the 28.5% growth assumption.
• Retail margin improvement: Better automation and robotics lifting the thin retail margins would add a second profit lever alongside AWS.
• Advertising momentum: Continued 20%+ growth in the ~$70 billion advertising business would further improve the group's profit mix.