If you bought shares of Amazon (AMZN +3.51%) one year ago, you're up nearly 14% now. That's just barely beating the 13% return of the S&P 500, but anytime you can beat the market, even modestly, it's a good day. Amazon Web Services (AWS), the company's cloud-computing segment, is performing particularly well, as are its e-commerce operations. And in Q4, strong growth finally lifted the business past Walmart in size.
With 2024 net sales of $638 billion, Amazon is massive. But for investors who are wondering where the stock will be in one year, I'd argue that its net sales aren't the most important financial metric to watch. To the contrary, I believe that Amazon's operating income is the better financial metric.
NASDAQ: AMZN
Key Data Points
A company's operating income represents only the profit produced by the business itself. For context, some businesses can earn some profits from things that aren't business related, such as investments. On the other side of the equation, sometimes a one-time tax bill or other unusual expense can sap the net profits of a company even when its business operations are profitable. The operating income metric leaves those non-core influences out, which is what sets it apart from other profit metrics.
For Amazon, the long-term chart is fun to look at. As a general rule, when the company's operating income is climbing, the stock price is also climbing. The opposite is also true.
On Feb. 6, Amazon reported record operating income of $68.6 billion. Unsurprisingly to me, Amazon stock also hit a record price of over $233 per share in February.
Based on the premise that Amazon stock rises when operating income is rising and pulls back when operating income is falling, investors might need to brace themselves for ho-hum returns in 2025. Here's why.
Demand for AWS is surging because Amazon's customers want to experiment with and implement artificial intelligence (AI) applications. And in order to meet those clients' needs, management is investing a lot of money into the platform. In fact, it plans to spend over $100 billion in capital expenditures in 2025, much of which will go toward AWS because of AI-related demand.
With 2025 shaping up to be a year of outsized capital investments, Amazon's management expects its operating income to fall modestly. It could be less than a $1 billion drop. But based on prior patterns, this suggests that Amazon stock will take a step back as well in 2025.
Before you hit the panic button...
I've just made a bold claim: Amazon stock might go down in 2025 -- or at best, will trend sideways. This could almost sound like I'm suggesting that investors sell. But here's why that's not the right takeaway from this prediction.
First, one year is a short time in the stock market. The shorter the period, the more investors' emotions tend to outweigh business fundamentals. Any number of (unexpected) things could happen in 2025 that could impact investors' emotions, sending Amazon stock either soaring or crashing. But eventually, the real positives and negatives of the business can be expected to reassert their influence over the share price. This is one reason why The Motley Fool's investing philosophy encourages investors to hold the stocks they buy for five years or longer -- one year is just too short of a time for the fundamentals to win out.
Second, it's possible that the worst is already over for Amazon's shareholders. After all, the company will likely report its second most profitable year ever from an operating-income perspective. And as of this writing, Amazon stock is already down 20% from its highs in 2025. That pullback is substantial compared to the modest profit decline that management is currently forecasting.
Third, Amazon's profits aren't expected to go down because of problems with its business. To the contrary, profits are expected to go down because management needs to invest in the business so that it can meet strong demand from customers. That's a really good thing long term.
Indeed, Amazon has had seasons like this in the past. When it sees an opportunity, it will forego some profits in the short term to invest in the business to profit in the long term. That's a great principle for a company to follow, and it's one of the things that has made Amazon one of the best-performing stocks of all time.
In summary, if Amazon stock underperforms the S&P 500 in 2025, I won't be the least bit surprised. That said, this outcome isn't a foregone conclusion. Moreover, the company still seems well positioned to capture long-term consumer demand, particularly with its AWS cloud-computing platform. If this happens, then Amazon's business should thrive and grow over the long term, which would eventually lift the stock to new highs even if its returns in 2025 are disappointing.
