Amazon (AMZN 0.21%) demonstrated remarkable financial strength in the fourth quarter, with revenues and earnings beating analysts' consensus expectations. Revenues were up 10.5% year over year to $187.8 billion, ahead of the Wall Street target of $187.3 billion. Adjusted earnings per share rose by 86% to $1.86, dramatically higher than the consensus estimate of $1.49.
NASDAQ: AMZN
Key Data Points
Despite the robust performance, the market's initial reaction to the Q4 report it delivered on Feb. 6 was negative. Investors were disappointed with management's weaker-than-expected revenue guidance for the first quarter of 2025. While analysts had been forecasting first-quarter revenues of $158.33 billion, management guided for a range of $151 billion to $155.5 billion. Additionally, the company's share price was impacted by the turbulence in the overall technology sector that was triggered by the release of Chinese start-up DeepSeek's new AI model, which has capabilities similar to OpenAI's GPT-4, but which reportedly was developed and trained at a fraction of the price of other large language models.
Although Amazon's growth outlook was a little unnerving, its multifaceted artificial intelligence (AI) strategy, which combines custom chip development and cutting-edge AI applications supported by a top-notch cloud computing platform, cannot be ignored. Here's why Amazon looks poised to head higher in 2025.
Robust AI strategy
Amazon's AI strategy has positively affected almost all aspects of its business, from cloud computing to advertising to e-commerce. The company plans to make capital expenditures of nearly $100 billion on AI initiatives in 2025, and a big chunk of that will go toward supporting AI for Amazon Web Services (AWS).
CEO Andy Jassy considers AI to be a "once-in-a-lifetime" type of opportunity for AWS since he expects all applications to be reinvented with AI technologies embedded in them. AWS's AI-related business is growing at triple-digit percentage rates annually. Amazon expects to grow at an even faster pace since its hardware-related capacity constraints are expected to start easing in the second half of the year.
As a part of Amazon's strategy to infuse AI across all layers of the AWS stack, the company designed the custom Trainium chip series. Virtual machines powered by Trainium 2 chips have demonstrated 30% to 40% better price performance than those powered by other GPUs on the market. This has impressed many companies, including Anthropic, Databricks, Adobe, and Qualcomm. It is also working on the Trainium 3 chip, and expects to preview it in late 2025.
Besides AI-capable hardware, Amazon is also offering clients a diverse choice of foundational models through its fully managed Amazon Bedrock service. The company has been rapidly adding several popular emerging models including DeepSeek's R1 into its AWS Bedrock and SageMaker platforms. Plus, Amazon has released its internally developed Nova family of frontier models, which have comparable capabilities to other Bedrock models, but significantly lower latency and costs.
All these AI initiatives have played a pivotal role in expanding the client base for AWS and boosting its profitability.
Amazon has also integrated generative AI technologies into various areas of its retail business such as customer service, shopping assistants, inventory management, and warehouse operations.
AWS catalyst
AWS has boosted its annualized revenue run rate to $115 billion, with growth driven mainly by the dramatic rise in enterprise demand for generative and non-generative AI offerings. Focused on completely tapping into the power of AI, many clients have restarted and accelerated their migrations of workloads to the cloud. In the fourth quarter, AWS' revenues were up 19% year over year to $28.8 billion, while operating income soared by 49.3% to $10.6 billion.
AWS has also introduced new services in non-AI infrastructure areas such as computing, storage, databases, and analytics. The company has launched a new serverless distributed SQL database called Amazon Aurora SQL, Amazon S3 tables with fully managed support for Apache Iceberg capabilities, improved Amazon S3 metadata capabilities, and next-generation Amazon SageMaker to integrate analytics and AI at scale.
Hence, although its hardware capacity constraints may affect its short-term growth, AWS' long-term fundamentals are exceptionally strong.
Valuation
Amazon trades at 38 times expected forward earnings, which at first glance looks expensive. However, several factors support this rich valuation.
Analysts expect Amazon's revenues and earnings per share to grow year over year by 9.58% and 29.65%, respectively, in 2025. Although that estimate for top-line growth is modest, the predicted bottom-line improvement is impressive -- especially considering the company's broad product portfolio and expansive geographic reach. With earnings improvement outpacing revenue growth, Amazon is also demonstrating dramatic improvements in operational efficiency despite its heavy investments in AI-related initiatives.
AWS is the global leader in the cloud infrastructure services market, with a 31% share in the fourth quarter. That segment accounts for just 15% of the company's revenues but contributes almost half of its overall profits. The strengths of AWS are undoubtedly a major factor supporting Amazon stock's premium valuation.
Amazon's advertising business is also picking up its pace; its annual revenue run rate reached $69 billion in 2024. Besides being a high-margin business, advertising helps boost sales of other products and services in Amazon's ecosystem. Finally, Amazon's e-commerce business is also seeing improved profitability.
In sum, this company boasts a diversified business model, extensive scale, and strategic positioning across several high-growth areas.
With all these tailwinds propelling it -- as well as the $100 billion in AI-related investments it will make this year to support further high-growth opportunities -- Amazon seems a compelling buy.
