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Amazon (AMZN) just released its Shareholder Letter. The main investment thesis remains: expand markets and then work on expanding margins. The results have been very positive, as we can see in the next section, but it is more important to understand how this will work for the future now that the company is already a behemoth.

Financial Results

Amazon posted solid numbers this year. Total revenue climbed from $575 billion to $638 billion—that’s an 11% increase year over year.

Here’s the breakdown by segment:

North America: Up 10%, rising from $353B to $387B

International: Grew 9%, from $131B to $143B

AWS: The standout performer—jumped 19%, from $91B to $108B

Operating income nearly doubled—going from $36.9B (with a 6.4% margin) to $68.6B (now a 10.8% margin). That’s an 86% jump, which is pretty striking and points to major efficiency gains across the board. Free cash flow, adjusted for equipment leases, ticked up slightly from $35.5B to $36.2B.

Bottom line: All the major business units—North America, International, and especially AWS—showed healthy growth. AWS is still on a tear, thanks to ongoing demand for cloud and AI tools.

Operations and Customer Side

Amazon kept expanding its selection and kept prices low—according to an independent study, it remained the lowest-priced online retailer in the U.S. for the eighth year in a row. On top of that, Prime members saw the fastest delivery speeds ever—again—for the second year straight.

There were some big tech moves here. Amazon rolled out new AI-focused infrastructure, including its latest chip, Trainium2. It also launched Amazon Nova, a new family of high-end foundation models, while continuing to build out SageMaker and Bedrock for generative AI.

Lots of fresh content dropped this year—new seasons of Fallout, Reacher, The Boys, and Rings of Power, plus movies like Road House, The Idea of You, and Red One. On the sports side, Thursday Night Football continued, UEFA Champions League came to Europe, and deals are already in place to bring NBA and NASCAR content in 2025. Also, Apple TV+ was added to Prime Video Channels.

All of these moves show Amazon broadening its product and service offerings, while staying fast and affordable.

Amazon’s Ethos: A Culture Built on Asking “Why?”

CEO Andy Jassy talks a lot about what he calls a “Why Culture”—basically, a mindset where people are encouraged to constantly ask, “Why not?” or “Why can’t we do this better?” That kind of thinking has powered a lot of Amazon’s biggest shifts over the years.

A few past “Why” moments that changed the company: Expanding beyond books into every kind of product, letting third-party sellers list on the same product pages as Amazon, and launching AWS so developers wouldn’t need their own data centers

Now, what will matter are the “next generation whys.”  These “next-generation Whys” are the driving questions shaping Amazon’s strategy in 2024 and beyond.

One of the biggest ones: Why is AI such a big deal? According to Andy Jassy, AI is on track to transform almost every customer experience. While early uses of AI have focused on streamlining internal tasks and cutting costs—things like automating support or internal processes—the real game-changers are coming.

The Why question will keep fueling growth pursuits

Amazon’s leadership is clear about what’s going to fuel its next phase of growth. Looking ahead, the company is placing big bets across a few major areas—each one tied to long-term trends and backed by heavy investment.

At the top of that list is artificial intelligence. AWS is going all-in here, building out its AI offerings with tools like Trainium2 (Amazon’s latest custom chip), as well as platforms like SageMaker, Bedrock, and Amazon Nova. The goal is to make AI more cost-effective and easier to use, both for big enterprises and everyday consumers. Demand for generative AI, in particular, is expected to explode. Amazon sees itself playing a role in everything from software development and robotics to healthcare and education, and it’s positioning AWS to be the backbone for that transformation.

The play will be to adopt market expansion strategies like the ones the company deployed in the past, drive consumer costs down to expand the addressable market, and then focus on expanding margins. This will be valid for personal assistants, retail delivery, and healthcare. First, the company builds infrastructure that drives convenience up and costs down, and only after it recognizes a solid offering does it go back to profitability – this has been their playbook since inception.

Driving margin expansion

One of the biggest levers Amazon has to improve its margins—both now and over the long haul—is scale. Nowhere is that more evident than in AWS. As more companies turn to AWS for their AI and machine learning workloads, Amazon can spread the massive infrastructure costs—think data centers, networking, and compute—across a broader base of customers. That higher utilization helps drive down the unit cost of running these services, especially as demand for AI ramps up. On top of that, AWS has been designing its own custom chips like Trainium2, which significantly reduce core compute costs. By relying less on third-party hardware and more on its own silicon, Amazon can lower expenses internally while still pricing competitively.

In its retail business, Amazon’s been steadily fine-tuning operations to reduce overhead and improve fulfillment economics. The company has restructured its logistics network to focus more on “regionalization”—basically, keeping inventory closer to where people live. This setup cuts down one of Amazon’s biggest cost drivers: transportation. Less distance means lower shipping costs, faster delivery, and better inventory accuracy. That all translates to less waste and better margins in the fulfillment network. Internally, Amazon is also tightening up its operations by trimming bureaucracy—reducing unnecessary layers of management and approval processes.

AI is also a margin story—not just a growth story. While training AI models gets most of the attention, Amazon knows that inference (the process of actually using trained models) will eventually dominate in terms of total usage. That’s where the real opportunity lies for improving margin. Through techniques like model distillation, caching, and ongoing hardware improvements, Amazon can lower the cost of inference—helping AWS increase gross margins on its AI services over time. And with more high-value generative AI tools and agent-based services coming online, there’s potential for premium pricing in certain enterprise use cases, especially when those services are delivered at scale with operational efficiency.

Culturally, Amazon is sticking to its “operate like a startup” philosophy—running lean teams and prioritizing builders over layers of management. By keeping the ratio of individual contributors high relative to managers, Amazon channels more resources into making and shipping products, rather than managing internal complexity. This approach helps keep costs in check while supporting fast-paced innovation.

Beyond its core businesses, Amazon continues to build out high-margin adjacencies. Advertising, for example, is a quiet powerhouse—placing targeted ads within the retail environment is one of the company’s most profitable revenue streams. Healthcare is another area with potential. If Amazon can simplify how people get prescriptions through Amazon Pharmacy or streamline primary care via One Medical, those services could operate at significantly better margins than traditional e-commerce. Over time, they could become meaningful contributors to overall profitability.

And finally, there’s the big-picture view. Amazon is still taking big swings—like Project Kuiper and the expansion of AI infrastructure—but these aren’t bets without a long-term plan. The company expects these capital-intensive projects to generate strong returns at scale. As those services mature and attract more users, the up-front investment gets amortized across a larger base. That’s when the free cash flow starts to accelerate—and operating income margins start to follow.

Dissecting Amazon’s Valuation

When it comes to valuing Amazon, the usual retail comparisons don’t really cut it. Most analysts tend to group it alongside the tech heavyweights—names like Apple, Microsoft, Alphabet, and Meta—rather than traditional retailers. And it makes sense why. Amazon isn’t just a place to buy stuff online; it’s built a massive ecosystem that blends hardware, cloud infrastructure, software, digital services, and advertising. Because of that, metrics like price-to-earnings and price-to-sales are often lined up against what we see in the “FAAMG” group. These are companies with global reach, deep product portfolios, and the kind of balance sheets that let them invest at scale, even during downturns.

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Source: YCharts

As for Amazon’s current numbers, they don’t fit neatly into one box. Its P/E ratio, hovering around 32.8, lands in a sort of middle ground. It’s higher than Alphabet (about 19) or Meta (23), which are more mature in the ad business, but still below growth-centric names like Netflix (46.5) and even Walmart (37.6). That suggests the market sees Amazon as more than just a retailer—but maybe not as a pure tech company either. Its valuation seems to price in real upside in areas like AWS and advertising, but with some caution.

The P/S ratio tells a similar story. Amazon sits around 3.0, which is significantly above Walmart’s 1.1, but still well below companies like Meta (8.7), Alphabet (5.6), or Netflix (10.4). This reflects a structural truth: retail margins are just thinner. Even with Amazon’s growing high-margin segments, its overall profitability is still anchored by a vast, capital-heavy retail operation. That pulls down the multiple compared to more streamlined, software-based businesses.

Still, the fact that Amazon trades so far above Walmart shows how the market views it: not just as a store, but as a hybrid platform with meaningful contributions from high-margin segments like AWS, ads, and subscriptions. Investors aren’t just betting on where Amazon is today—they’re pricing in where it could go next.

So what drives Amazon’s valuation today? A big part of it is its multi-segment business model. On one hand, you have the core e-commerce platform, which moves a ton of volume but doesn’t generate huge margins. Amazon deliberately reinvests in fulfillment, price competitiveness, and logistics, often at the cost of short-term profitability. But on the other hand, you’ve got AWS, a high-margin cloud business that regularly delivers the majority of Amazon’s operating income. That segment alone warrants a higher valuation multiple, similar to Microsoft Azure or Google Cloud. Then there’s advertising—sponsored product placements and display ads are growing quickly and carry excellent margins. Together, AWS and advertising help justify a valuation more in line with tech than retail.

Zooming out, Amazon’s valuation sits in a space that reflects its hybrid identity. Its 3.0x P/S ratio is far above that of a traditional retailer like Walmart, but lower than most of its tech peers—mirroring its blended model. Its P/E around 33 is also somewhere between growth-heavy optimism and mature-business pragmatism.

Bear Case for Amazon

While Amazon has a lot going for it, there are also meaningful risks and headwinds that investors need to keep in mind—especially when a company of this size is still betting big on long-term growth. One major concern is overinvestment and the potential for delayed payoffs. Amazon is spending heavily on AI infrastructure—including data centers and its custom Trainium chips—as well as large-scale initiatives like Project Kuiper (satellite internet), robotics, and healthcare. These aren’t cheap ventures.

There’s also execution risk. Amazon has a history of big swings, and not every one of them turns into an AWS-style success story. Projects like Kuiper, Alexa+, or its forays into healthcare could fail to gain traction or deliver the kind of returns the company is banking on. If those bets flop, they could drag on earnings and sentiment for a long time.

In the cloud business, Amazon is still a dominant player, but the competitive landscape is fierce. Microsoft Azure and Google Cloud continue to chip away at AWS’s lead, and a full-blown pricing war could compress margins, especially for AI workloads that are resource-intensive. Even on the hardware front, Amazon is pushing its custom AI chips (like Trainium2), but it’s still up against major players like Nvidia and AMD.

There’s also a broader risk around the AI boom itself—namely, whether it plays to Amazon’s strengths. The company is focused on being a toolmaker with platforms like SageMaker and Bedrock, but companies like Microsoft (via OpenAI) and Google are shaping up as the go-to platforms for enterprise-level AI.

There’s also the human side of the equation. Maintaining Amazon’s “Why Culture” at its current scale is no easy task. As the company grows more complex, there’s always the risk that bureaucracy creeps in and innovation slows. Meanwhile, competition for top-tier AI and cloud talent is intense.

Bottom-line

Amazon continues to straddle two worlds—its low-margin retail foundation and its increasingly important, high-margin tech businesses. That mix puts its current valuation somewhere in the middle of the pack. With a P/E ratio of around 32.8 and a price-to-sales ratio near 3.0, Amazon trades above traditional retailers like Walmart, but below pure tech and streaming companies such as Meta, Alphabet and Netflix.

Looking forward, the stock’s potential really hinges on execution. In a bullish scenario, if Amazon successfully leans into AI, continues to grow AWS, and further scales its advertising business, some analysts forecast earnings per share of $10.60 by 2027. Apply a 30x multiple to that, and you get a price target of $318, which would translate to roughly 20.7% annualized returns from a current price of around $181. On the flip side, in a bearish case where growth slows or heavy investments in areas like healthcare or satellite broadband fail to deliver, EPS could land closer to $7.74. At a more conservative 20x multiple, that points to a $154.80 price target, implying a modest –5.1% annualized loss over the same period.

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Source: Seeking Alpha

Ultimately, Amazon is still playing from its long-established playbook: expand aggressively, then optimize for margins. That strategy has worked before—most notably with AWS and the third-party Marketplace. As the company pushes into big, capital-intensive areas like AI infrastructure, healthcare, and satellite internet, the payoff may take time.

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