The recent sell-off has left few stocks unscathed, including “Magnificent Seven” stocks such as Amazon (NASDAQ: AMZN). As of early April, the stock is down 20% since the beginning of the year and sells at nearly 30% below the all-time high it achieved in early February.
These early results could have implications for the stock’s performance in 2025. Let’s take a closer look at Amazon’s businesses and financials to see if the stock could still be a winner this year.
It may surprise some investors to learn that the online sales enterprise is likely not a compelling reason to buy Amazon stock. Although its e-commerce operation is the company’s largest revenue generator, retailing is a low-margin business and likely serves as a loss leader that supports higher-margin software businesses.
Among these are third-party seller services and digital advertising. Thanks to the power of its sales site, Amazon profits by partnering with independent retailers. They post on Amazon’s site, and in return, Amazon receives a cut of the revenue after the sale is made. Amazon also derives revenue by posting ads on its site, a strategy that has brought significant margins to tech giants such as Alphabet and Meta Platforms.
However, its highest-margin business, Amazon Web Services (AWS), has little to do with retailing. AWS pioneered the cloud computing business. Although several other tech giants now compete in the cloud, Amazon remains the leading cloud company.
Image source: Statista.
With the demand for generative AI, Amazon is also well positioned to deliver and profit from that technology. So successful is this business that it returned a 37% operating margin in 2024, up from 26% in 2023.
Can Amazon’s cloud and software businesses boost the company in 2025? In 2024, Amazon’s $387 billion in net sales grew by 10%. That led to $69 billion in operating income, which was up 86% yearly and was mostly driven by the $40 billion contributed by AWS. When accounting for non-operating income and expenses, Amazon earned a net income of $59 billion, 95% more than in 2023.
Although Amazon doesn’t publish annual guidance, analysts forecast that revenue will grow by 10% annually in 2025. That should bode well for a continued expansion in its operating income. Unfortunately for Amazon shareholders, the same analysts foresee a dramatic slowdown in profit growth, which is on track to rise by only 15% in 2025. Investors tend to look unfavorably on slowing net income increases, so this could have a negative effect on shares this year.
The one area that has become increasingly favorable for Amazon is valuation, with the stock currently selling at a P/E ratio of 32. You can attribute the falling valuation to the company maturing (its market cap is almost $1.9 trillion). Still, Amazon often sold for more than 50 times earnings, and even if earnings growth slows to the 15% range, investors could see the current earnings multiple as a reason to buy despite slowing revenue increases.
Despite the market turmoil, Amazon stock holds tremendous potential to perform well in 2025, although the falling valuation and slowing earnings growth may not reflect well on the company’s stock.
Amazon’s third-party seller and ad businesses continue to post double-digit revenue growth, and AWS’ operating income is rapidly surging higher. These successes may prompt investors to ask whether the valuation is too low, an unusual situation for Amazon and one that could draw additional interest.
Amazon has become a model for adaptability as the online retailer has prospered as a tech giant. Considering its more successful businesses and discounted P/E ratio, now is an excellent time to add shares.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.
