Amazon (AMZN) Asserts Dominant Position in Cloudy AI-Powered Future
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Additionally, the expansion driven by AI appears to be contributing to margin improvement, enhancing the company's overall profitability. Given these trends, Amazon's valuation remains compelling—even near its historical highs—supporting a continued Bullish outlook for the stock.
AWS and Nova Fuel Amazon's AI Growth
On Amazon's Q1 earnings call, CEO Andy Jassy couldn't stop raving about AWS's AI momentum, noting that its AI business is growing at triple-digit rates year-over-year. Seeing the progress AWS has made in the recent quarter, I totally get his enthusiasm. While we are still early in the game, it appears that AWS is capturing the lion's share of enterprise demand for AI tools, such as Amazon Nova, which powers areas like automated coding and advanced web analytics. Consider recent deals with heavyweights such as Adobe (ADBE) and Uber (UBER), or the $5 billion partnership with HUMAIN in Saudi Arabia to expand AI infrastructure globally.
Why is AWS still such a beast? Much of it comes down to Amazon's custom chips, such as the new Trainium 2, which help reduce the cost of training and running AI models. Jassy called them out recently, and for good reason. That kind of technology gives AWS a significant advantage, including higher speed, lower costs, and significantly more flexibility for customers.
And clearly, it's working. AWS pulled in $29.3 billion last quarter (up 17% from last year), and it's sitting on a $189 billion backlog. Microsoft's (MSFT) Azure is definitely pushing hard, but AWS still has the early lead in AI and has now captured about 31% of the cloud market. It's hard to bet against them.
Profitability on the Rise: AI's Margin Magic
Now, let's talk about why this AI boom is a goldmine for Amazon's bottom line. Beyond contributing to higher revenues, AWS is also significantly boosting margins, according to TipRanks data. In Q1, AWS posted $11.5 billion in operating income with a 39.5% margin, a standout in Amazon's $18.4 billion total operating income, which jumped 20% year-over-year.
CFO Brian Olsavsky highlighted smarter software and custom networking gear as key drivers, optimizing server capacity and reducing infrastructure costs, which explains the significant boost in margins.
The broader picture is just as exciting. Amazon's high-margin businesses, including AWS and a 19% surge in advertising revenue to $13.92 billion, are reshaping its margin profile and pointing to an increasingly profitable company, despite its still low-margin retail business. All in all, AWS remains the standout revenue driver, according to TipRanks data.
There is also strong cross-selling potential here, as many companies running on AWS are likely to want to advertise, so as AWS onboards more clients in the AI era, it is expected to acquire potential advertising partners 'for free', which could prove another long-term margin expansion catalyst.
Is AMZN's Valuation Stretched?
Investors may be thinking that since AMZN is currently trading near its 52-week highs, the train may have left the station. Not so fast. Yes, at a forward P/E of 35, Amazon's valuation seems steep, but it is actually far from unreasonable when you consider its growth trajectory. Consensus estimates forecast 18% annual EPS growth over the next five years, but I'm convinced Amazon could outpace that, potentially hitting 20-22%. If we look at AMZN's EPS in Q1 2025 ($1.59), it already smashes estimates by 16%, while AWS's AI-driven revenue and margin gains point to more upside. In the chart below, AMZN's revenue is dominated by e-commerce, third-party seller services, and AWS.
Therefore, Amazon stock should be able to easily grow into today's forward multiple in the coming years, which, in turn, will sustain the bullish momentum. For context, Microsoft is trading at a heftier 37x this year's expected EPS, despite Wall Street expecting a much softer EPS CAGR of 11% over the next five years.
Oracle (ORCL), which also competes heavily with Amazon, trades at an equally rich 34x EPS. While its cloud segment is also performing incredibly well, its legacy database still accounts for a significant portion of the total business, which one could argue should weigh on the valuation at lower levels.
What is the Target Price for AMZN Stock?
Despite Amazon stock trading very close to its highs, Wall Street maintains a Strong Buy consensus rating. This is based on 45 Buy and one Hold ratings assigned over the past three months. Notably, no analyst has assigned a Sell rating. Today, Amazon stock carries a price target of $246.60 per share, indicating a 12% upside potential over the coming twelve months.
AMZN's AWS Angle Ensures Long-Term Investment Case
Amazon's AI-driven momentum, led by AWS, shows no signs of slowing. With triple-digit growth in its AI segment, operating margins approaching 40%, and a substantial $189 billion backlog, AWS is reinforcing Amazon's leadership in the cloud space and positioning the company for broader technological influence.
While Amazon's forward P/E ratio of 35 may appear elevated, the company's potential to exceed current earnings growth forecasts of 18% could make this valuation appear attractive in hindsight. As AWS continues to scale and drive enhanced profitability, valuation multiples are likely to normalize, further supporting the long-term investment case for AMZN.
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