Amazon’s Quiet Comeback: A Buy Signal?

by

So, here I am, staring at my screen, wondering why Amazon hasn’t been the star of 2025. As of mid-September, the stock is up only about the mid-single digits year to date, while the S&P 500 is up in the low teens. That gap has opened even as the retailer and cloud leader posted strong financial results and guided to solid growth. A bit of a conundrum, isn’t it? I mean, who needs a stock that’s quietly building its case when the market’s all about drama?

Amazon, of course, is the e-commerce and cloud-infrastructure giant behind online retail, Prime, and AWS. With the market’s attention rotating across themes this year, its quieter performance masks improving fundamentals. That mismatch sets up a straightforward case: The business is strengthening while the growth stock is merely getting by, creating an opportunity for investors who want to get off the sidelines and own shares of a great company for the long haul. Or, as I like to call it, “the classic ‘I told you so’ moment.”

Momentum is building where it matters

Amazon’s latest quarter underscored durable growth and expanding profitability. In Q2, net sales rose 13% to $167.7 billion, and operating income climbed 31% to $19.2 billion, lifting the operating margin to 11.4%. Earnings per share were $1.68, up 33% year over year. Management also pointed to a healthy outlook: Third-quarter net sales are expected to grow 10% to 13%, with operating income between $15.5 billion and $20.5 billion. All of this makes me want to slap myself for not buying more shares last week.

Beneath the headline numbers, the three engines investors care most about are moving in the right direction. First, AWS revenue increased 17% to $30.9 billion. Operating margin in the segment was 32.9%. While that margin is lower than the prior quarter as Amazon invests in capacity and power to meet AI demand, trailing-12-month AWS operating margin remains a robust 36.8%. Second, advertising services revenue rose 23% to $15.7 billion, showing the company’s growing clout with merchants and brands. Third, the core retail network continues to scale efficiently: operating income in its important North America retail segment increased 48% to $7.5 billion, with the segment margin improving to 7.5%. Its international retail segment saw operating income jump from $0.3 billion to $1.5 billion as sales rose 16% year over year. I’m starting to think I’ve been too quick to judge.

In his comments in the company’s second-quarter earnings release, Amazon CEO Andy Jassy drew attention to AI. “Our AI progress across the board continues to improve our customer experiences, speed of innovation, operational efficiency, and business growth, and I’m excited for what lies ahead,” Jassy said. I’m not sure if I’m more excited about the AI or the fact that I might have missed the boat on this one.

Loading widget...

The investment case today

The near-term bear case boils down to two points: massive capital expenditures and competition. Capital spending remains heavy as Amazon expands data centers, networking, and power to support AI workloads; reflecting the build-out, trailing-12-month free cash flow (the cash left over after both regular operations and capital expenditures are taken care of) was $18.2 – down from $53 billion in the year-ago period. And in cloud, Microsoft and Alphabet are formidable, well-capitalized competitors that are similarly investing aggressively in AI. All of this makes me want to throw my hands up and say, “Why is this so complicated?”

Those are real considerations, but they sit alongside strengthening unit economics in retail, a rapidly expanding ads business, and a cloud platform that is growing rapidly as Amazon pivots to AI-centric demand. Additionally, Amazon’s significant investment in AI can also be seen as a reason to be upbeat. After all, the company wouldn’t be spending so aggressively if it didn’t believe there would be a payoff. I’m starting to think I’ve been too cautious.

With shares trading in the low-$230s as of this writing, Amazon trades for roughly 35 times earnings. That is not cheap, but context matters: Operating margin for the company has marched from single digits to more than 11%, and the company could see additional operating leverage as revenue rises and as AWS becomes a larger share of overall revenue. Additionally, if AWS’s already lucrative margins stabilize as new capacity comes online, and retail continues to generate mid- to high-single-digit margins at scale, earnings power may climb faster than revenue over the next few years. In that scenario, today’s multiple may not look demanding. But I’m still not sure if I’m ready to commit.

On the other hand, a slower economy could weigh on discretionary spending, and cloud optimization could resurface. Further, power constraints or supply chain delays tied to data center buildouts could also pressure AWS’s margins in the near term. Investors, therefore, should keep an eye on capex and AWS profitability as leading indicators. I’ll be watching closely, but I’m not sure I’ll be brave enough to act.

But the bigger picture is constructive. Amazon is firing on several cylinders: retail margins are improving as the logistics network densifies, advertising is growing at meaningful rates, and AWS remains the backbone for thousands of enterprises. Not to mention that Amazon is layering in AI services across its business, creating new long-term growth opportunities. These dynamics – broad-based growth, rising profitability, and aggressive investment in AI – make a compelling case to use 2025’s relative underperformance as an opportunity to buy into the stock’s weakness. For investors looking to beef up a portfolio with a high-quality compounder, buying Amazon while sentiment is only lukewarm could prove to be lucrative over the long term. Or, as I’ve been telling myself all week, “Just do it.”

Units of Cryptocurrency Lost: 12. Hours Spent Watching Charts: 9. Number of Panicked Texts to Friends: 24. 📈

Read More

2025-09-19 11:07