One of the more notable transformation stories in tech recently is Amazon (AMZN -0.44%). The online seller pioneered e-commerce in North America and many parts of the world. And with its role in creating the cloud, it later evolved into a conglomerate.

However, mounting e-commerce losses mean that the cloud segment, Amazon Web Services (AWS), drives most (or sometimes all) of the company's profits. This does not negate the investment case for Amazon, but profiting from Amazon will require investors to look at the internet and direct marketing retail stock in a different light.

E-commerce as a 'loss leader'

After years of profits, Amazon's e-commerce operations now lose money. But despite the losses from online retail, its reputation serves as a platform for its actual growth drivers. Indirectly, its web presence acts as an undeclared Amazon advertising campaign, keeping its name in the minds of the public. It also drives considerable market power, allowing it to compete aggressively against top retailers such as Walmart and Costco.

Moreover, e-commerce has enabled Amazon to sell advertising on its website. Due to its position in both the North American and International segments, the public did not know Amazon's ad revenues until recently.

Still, investors should pay close attention to this revenue stream. At nearly $17 billion in revenue for the first half of 2022, its revenue grew 20% compared with the same time frame in 2021.

Despite the success of advertising, the most significant bright spot is AWS. Although it is responsible for only 16% of Amazon's revenue, it is the fastest-growing segment, increasing by 35% year over year. It was also the only segment this year to report positive operating income. Additionally, over the trailing 12 months, it reported a 31% operating margin. That margin has helped it generate the majority of company profits for years.

Amazon's Financials by Segment in the First Half of 2022
Segment Revenue Operating Income (Loss)
North America $143,674 ($2,195)
International $55,824 ($3,052)
AWS $38,180  $12,233

Source: Amazon Investor Relations.

Valuation and stock performance

This "loss leader" status for e-commerce also means investors should take its price-to-earnings ratio with a grain of salt. Admittedly, triple-digit earnings multiples for Amazon are nothing new. After its P/E ratio fell under 50 early in the year, it again surged above 100.

However, this occurred not because of a rising stock price but because profits turned negative, specifically in the previous two quarters. Consequently, Amazon stock sells at a nearly 40% discount from its all-time high in mid-2021.

Moreover, it appears cheaper from a revenue perspective. Amazon sells for about two times sales. That closely approximates the sales multiple of emerging e-commerce rival Sea Limited and dwarfs the price-to-sales (P/S) ratio of MercadoLibre. It also lags behind cloud rival Microsoft, which sells at 9 times sales, meaning Amazon has arguably become a value stock.

Amazon looks like a great buy

The "loss leader" perspective should change the narrative for Amazon stock. Investors now get the e-commerce business for "free" if they buy Amazon for AWS. Additionally, a low P/S ratio and the success of the digital ad business bolster the investment case.

Finally, investors need to remember that Amazon's businesses continue to undergo constant change. If its e-commerce segments can shed their "loss leader" status and return to profitability, they could serve as additional catalysts to propel Amazon stock.