It wasn't that long ago that some were starting to doubt Amazon (AMZN +1.90%). The company was losing ground to its closest competitors in the cloud computing infrastructure market, while tariffs threatened the profits of merchants on its e-commerce platform as well as its financial results. However, recent developments have given the stock a positive jolt. While Amazon hasn't completely resolved all its issues, the stock climbed to an all-time high following a strong quarterly update and a key move in the cloud industry. But is it still worth investing in Amazon at current levels?
The business is booming
In the third quarter, Amazon's sales grew by a solid 13% year over year to $180.2 billion. All three of the company's core segments posted revenue growth in the double-digit percentages, but the market particularly honed in on Amazon Web Services (AWS), its cloud unit. AWS' sales jumped 20% year over year to $33 billion. That's still below the growth rate of some of its peers in the cloud industry. For instance, Alphabet's Google Cloud revenue soared 34% year over year in Q3, but its sales of $15.2 billion were less than half of AWS'.
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AWS sales growth in the quarter was higher than the segment's average over the past few years. As CEO Andy Jassy noted, that was the fastest pace it has recorded since 2022. Meanwhile, Amazon's net earnings per share came in at $1.95, about 36% higher than in the year-ago period.
There was one business unit that grew even faster than AWS: advertising. The company's ad sales for the period totaled $17.7 billion, up 22% from the prior-year quarter.
Potential growth catalysts
Even with strong growth from advertising and cloud computing, Amazon's total sales increased only 13% year over year, as its core e-commerce business generates the lion's share of revenue. However, that's a fairly low-margin operation, and as advertising and cloud computing grab a larger percentage of revenue, the company's sales growth should improve. This will also affect its earnings and margins, as AWS already accounts for most of Amazon's operating profits.
Thankfully, there should be a long growth runway for both advertising and AWS. Amazon has the top market share in cloud computing and is the fourth-largest digital advertising platform worldwide.
NASDAQ: AMZN
Key Data Points
The company also boasts a wide economic moat that positions it to keep profiting from these long-term tailwinds. In advertising, Amazon is one of the most visited websites in the world, has a strong brand name, and deep network effects within its e-commerce platform that practically guarantee it will continue to attract both buyers and sellers. In cloud computing, the company benefits from high switching costs. Further, Amazon entered into a partnership with OpenAI, the company behind ChatGPT, and will provide cloud services to it. That deal is worth $38 billion over seven years.
While that doesn't seem like a lot -- it amounts to about $1.4 billion per quarter for Amazon -- the deal should help cement its leadership in the cloud infrastructure space in the face of intensifying competition.
Is the valuation reasonable?
Amazon is a leader in several industries that are still growing rapidly and boasts a solid competitive edge. But is the stock still attractive at current levels? Shares are trading at 28.6 times forward earnings. That's slightly lower than the average forward P/E ratio of 30 for consumer discretionary stocks, despite Amazon's outstanding prospects. And it doesn't even account for other aspects of its business, including its vast ecosystem of Prime members and its growing ambitions in healthcare. For all those reasons, Amazon stock remains a buy even near its all-time highs.
