Business Description
Amazon is the biggest e-commerce company outside of China. It is also the number one company in the cloud business. Its ads revenue business is growing rapidly as well, which is similar to how Taobao earns its money in e-commerce.
On the consumer side, the prime memberships are very sticky with its great value that includes Prime Videos, two-day or same-day shipping, higher cashback on its visa cards, more discounts from Whole Foods, music streaming, Prime reading catalog, Amazon Photos, etc.
Its IoT devices, while not complete, are all very popular. Amazon also owns the largest ebook market including the ebook hardware reader: Kindle.
Basically, Amazon has potential in a lot of daily life goods and services which do not require high-end technology. It challenges incumbents with high profit margins. Amazon is definitely a killing machine.
In recent years (2024 and before), while its total net sales only grew around 10% annually, its operating income and free cash flow grew rapidly due to rapid margin expansion as revenue from AWS (Amazon Web Service) and Ads finally caught up with its e-commerce businesses.
At a high level, AWS's sales is only ⅙ of the total, but its operating income is ⅔ of the total. AWS and its Ads business are growing revenue 20% annually and with a long runway, so the earnings power of Amazon still has a long way to go.
SWOT analysis
Strengths
Strong moat in its e-commerce business that helps its ads business a lot.
Its Prime membership is like Costo membership that brings a lot of value to users. That gives it a very high brand value, which makes it easy for Amazon to enter any consumer businesses to earn more money.
Strong execution in its cloud business AWS gives it the top spot among cloud providers.
Weaknesses
Amazon does not have top technology. Its strengths are mostly in execution. Companies with better innovation in the DNA like Google or OpenAI may disrupt its businesses in an unexpected way, e.g.
Unique AI offerings from Google and OpenAI (through Microsoft Azure) may crush AWS.
Advancement in robotics may eliminate the logistics advantage of the Amazon e-commerce business.
Amazon does not have a good reputation in rewarding talents. It impedes its ongoing innovation research effort somewhat.
Opportunities
More business lines for Amazon e-commerce business
Migration from on-premise to cloud infrastructure from companies ensures a long runway for AWS. The recent AI boom rapidly increases the cloud computing needs due to the cost efficiency gain in higher utilization rates of expensive hardware.
Threats
Unique AI offerings from Google and OpenAI (through Microsoft Azure) may crush AWS.
Advancement in robotics may eliminate the logistics advantage of the Amazon e-commerce business.
The Pinduoduo e-commerce model that focuses on low prices may disrupt Amazon e-commerce business, just like what Pinduoduo did to Alibaba, due to the counter positioning for the low-valued goods.
References
Updates
2025/08/01 Valuation after 2025 Q2 earnings
Net sales increased 13% to $167.7 billion in the second quarter, compared with $148.0 billion in second quarter 2024. Excluding the $1.5 billion favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales increased 12% compared with second quarter 2024.
North America segment sales increased 11% year-over-year to $100.1 billion.
International segment sales increased 16% year-over-year to $36.8 billion, or increased 11% excluding changes in foreign exchange rates.
AWS segment sales increased 17.5% year-over-year to $30.9 billion.
Operating income increased to $19.2 billion in the second quarter, compared with $14.7 billion in second quarter 2024.
North America segment operating income was $7.5 billion, compared with $5.1 billion in second quarter 2024.
International segment operating income was $1.5 billion, compared with $0.3 billion in second quarter 2024.
AWS segment operating income was $10.2 billion, compared with $9.3 billion in second quarter 2024.
Net income increased to $18.2 billion in the second quarter, or $1.68 per diluted share, compared with $13.5 billion, or $1.26 per diluted share, in second quarter 2024.
Operating cash flow increased 12% to $121.1 billion for the trailing twelve months, compared with $108.0 billion for the trailing twelve months ended June 30, 2024.
Free cash flow decreased to $18.2 billion for the trailing twelve months, compared with $53.0 billion for the trailing twelve months ended June 30, 2024.
Estimate for 2026 EPS is $7.31. Despite its deceleration in AWS revenue growth from 2025 Q2 earnings result, I still believe Amazon can grow its EPS by 20% annually for 10 years starting from 2026.
If we assume Amazon has a forward P/E of 20 9 years later, we get the following buy below price with a discount rate of 15%:
$7.31 * 1.2^9 * 20 / 1.15^9 = $214. P/E = 29.27
2024/08/02 Valuation
Estimate for its 2025 EPS is $5.83. Analysts expect it to grow around 10% annually for 8 years. I think the estimate of growth is too low. With its rapid margin expansion, and the ~20% revenue growth from AWS and Ads, I believe Amazon should have no problem growing its EPS by 20% annually for 10 years starting from 2026.
If we assume Amazon has a P/E of 20 ten years later, we get the following buy below price with a discount rate of 15%:
$5.83 * 1.2^10 * 20 / 1.15^10 = $178. P/E = 30.5
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