The recent market downturn has affected most stocks, including the “Magnificent Seven” stocks, such as Amazon (AMZN), which has experienced a decline of 20% since the beginning of the year. By early April, the stock was nearly 30% below its all-time high reached in early February. These early performance trends might influence the stock’s trajectory in 2025. An analysis of Amazon’s operations and financials is necessary to assess the potential for it to remain a competitive stock this year.
For Amazon, its online retail segment might not be the most compelling reason for investment. Despite being the largest revenue source for the company, e-commerce operates at low margins and possibly serves mainly to support Amazon’s higher-margin software divisions. These include services provided to third-party sellers and digital advertising. Through its influential platform, Amazon collaborates with independent retailers who list their products on Amazon’s site, earning the company a portion of the revenue from each sale. Additionally, Amazon generates income from advertising on its platform, following a model that has been profitable for tech leaders like Alphabet and Meta Platforms.
Amazon Web Services (AWS), however, stands out as its most lucrative segment, largely independent of its retail operations. AWS, which pioneered the cloud computing sector, remains a leader despite competition from other tech giants. As the demand for generative AI increases, Amazon is well-positioned to capitalize on and monetize this technology, evident in AWS’s operating margin, which rose to 37% in 2024 from 26% in 2023.
Evaluating Amazon’s financials, its cloud and software divisions have the potential to bolster the company in 2025. In 2024, Amazon achieved $387 billion in net sales, reflecting a 10% increase, leading to an operating income of $69 billion—an 86% rise from the previous year, significantly driven by AWS’s $40 billion contribution. After accounting for non-operating income and expenses, Amazon’s net income reached $59 billion, marking a 95% year-over-year increase.
Although Amazon does not provide annual guidance, analysts anticipate a 10% annual revenue growth for 2025, which could support further expansion in operating income. However, there is a forecasted slowdown in profit growth, expected to be only 15% in 2025, which may impact investor sentiment negatively due to the decreasing momentum in net income gains.
Amazon’s valuation has become increasingly attractive, with the stock trading at a P/E ratio of 32. The reduced valuation reflects the firm’s maturation, with a market cap nearing $1.9 trillion. Historically, Amazon traded at over 50 times earnings, and even with a potential slowdown to 15% earnings growth, the current earnings multiple might entice investors to buy, despite the decelerated revenue growth.
In 2025, despite market challenges, Amazon’s stock could potentially perform well, even if its decreasing valuation and slowing earnings growth create a negative perception. The continuous double-digit growth in Amazon’s third-party seller and advertising businesses, paired with rapidly increasing AWS operating income, might lead investors to question whether the current valuation is undervalued. This unusual scenario could attract more interest in Amazon’s shares.
Amazon exemplifies adaptability, thriving not only as an online retailer but as a major tech entity. Given its strong business segments and discounted P/E ratio, this presents a promising opportunity for investors to consider accumulating Amazon shares.
