The market has put up a strong run this year, with the S&P 500 and Nasdaq charging to fresh highs, but Amazon's (AMZN 0.78%) stock has sat on the sidelines, basically flat. That disconnect is worth paying attention to. Amazon is firing on multiple cylinders across its businesses and has put itself in a position to generate stronger profits in the years ahead.
While the stock may look stuck, the fundamentals underneath are moving in the right direction.
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Cloud growth and operating efficiency
Most investors still think of Amazon as an e-commerce company, but its biggest profit engine is its cloud computing unit. Amazon Web Services (AWS) revenue jumped 17.5% last quarter to nearly $31 billion, with operating income climbing past $10 billion. That kind of operating margin profile stands in stark contrast to the thin margins in its e-commerce operations.
What is more important, though, is that AWS is becoming a hub for artificial intelligence (AI) development. Its Bedrock solution lets customers tap into leading foundation large language models (LLMs) so they can customize them for their needs, while SageMaker gives companies a platform to train and deploy their own models. Amazon also has its own AI chips, Trainium and Inferentia, which give customers a cheaper and more efficient alternative to graphics processing units (GPUs).
With demand for AI workloads surging, AWS has been a strong beneficiary. The company also recently rolled out new solutions like Strands and Agentcore to help build AI agents, which could become another growth driver.
At the same time, Amazon is embedding AI across its entire e-commerce ecosystem. This is where a lot of the company's earnings growth could come from in the years ahead.
One area of Amazon that is often overlooked is its leadership in robotics. Amazon already has more than a million robots working in its fulfillment centers, and the machines today are doing much more than just moving boxes. Some can detect damaged goods before they are shipped, reducing costly returns, while others are actually able to repair themselves. Meanwhile, its Deepfleet AI model orchestrates how these robots move, making sure they are as efficient as possible.
Amazon is also using AI to reduce shipment times. It's using AI to predict which warehouses are the best to store items in, and to optimize delivery routes. It's even using AI to help delivery drivers find hard-to-find drop-off locations in places like large apartment complexes. These are small improvements that can translate into billions in cost savings over time.
In addition to fulfillment and logistics, Amazon is using AI to improve other areas of its e-commerce operations. Its Rufus AI assistant was designed to help customers find the right products for their needs, helping to increase spending and reduce returns. It's also using AI to make its third-party listings better and to help advertisers better target potential buyers.
Advertising is another one of Amazon's underrated growth drivers. Its sponsored ad business carries high gross margins and has been one of the fastest-growing parts of its business. Add it all up, and Amazon is seeing a ton of operating leverage in its e-commerce business. This was on full display last quarter, when its North American operating income surged 47% to $7.5 billion on just an 11% increase in revenue to $100.1 billion.
An investment in Amazon is not risk-free. The company is spending heavily on data centers to keep up with cloud and AI demand, and that kind of capital expenditures (capex) could pressure margins if it overbuilds and ends up with too much capacity. Competition in cloud computing is also intense, with Microsoft, Alphabet, and Oracle also investing heavily to capture strong demand. Meanwhile, just like every retailer, if the economy slows, its sales could take a hit. That said, these are not new risks, and Amazon has navigated through tougher challenges before.
Is it time to buy the stock?
With Amazon's stock flat on the year, now looks like a great time to scoop up shares. The stock has been a laggard among big tech names, but Amazon is not a stock I would count out.
The company has a history of investing big to win big, and it's no different now with AI. With a lot of good things happening under the hood, the stock looks like a no-brainer buy at current levels.
