Based on nothing more than the stock's lackluster performance of late, it would be easy to dismiss Amazon (AMZN 1.52%) as a prospect for your portfolio. Amazon shares haven't just trailed the overall market this year. They've not made any net forward progress during this stretch. Something certainly seems to be wrong, even if investors can't quite put their finger on it.
However, as the adage goes, you should expect it when you least expect it. Amazon's stock may well be on the verge of a rebound for reasons that aren't obvious, but soon will be.
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The Amazon you know
You know the company. Amazon is, of course, the king of North America's e-commerce industry, single-handedly accounting for nearly 40% of the United States' online sales (according to data from Digital Commerce 360). The next-nearest e-commerce rival is a formidable Walmart, but it's a distant second with control of only about 10% of the country's online shopping business. Although it operates overseas, roughly three-fourths of its e-commerce revenue comes from within the United States, and roughly half of its total top line comes from online sales of products.
Product sales were up nearly 10% year over year last quarter, by the way, accelerating the pace seen earlier in the year while extending a years-long growth streak.
The rest of Amazon's revenue comes from subscriptions and other digital services, and perhaps most notably, the company's cloud computing arm. Although Amazon Web Services (AWS) accounts for less than 20% of the organization's top line, through the first three quarters of 2025, it has produced 60% of Amazon's operating profits. Last quarter's year-over-year revenue growth of 20% from AWS is also encouraging.
Nevertheless, the stock's recovery effort from its early 2025 setback stalled out before catching up with the overall market's gains this year.
What gives, Amazon?
Two likely factors are weighing on this ticker.
First, AWS's profit margins are shrinking at the same time it's losing cloud market share. Because of that, investors may be having second thoughts about the company's planned increase in capital expenditures for the full year. It had budgeted $118 billion for capex. But, with its third-quarter report, Amazon announced it would be raising this figure to $125 billion for the entirety of 2025, mostly to meet demand for artificial intelligence (AI)-related solutions and services. Next year's AI-related spending is also expected to be heavy.
Second, as much e-commerce scale as Amazon enjoys, this business continues to maintain agonizingly low margins at roughly 5% of its revenue. And that includes high-margin subscription revenue for services like Prime or Amazon Music.
It's also difficult to ignore that e-commerce's operating profits actually fell last quarter, even though sales improved. The company can't afford for this setback to turn into a trend.
So, investors' recent hesitancy and the stock's subsequent underperformance make enough superficial sense. Now dig deeper into the details of both aforementioned concerns.
NASDAQ: AMZN
Key Data Points
It's the other Amazon that makes the stock a buy
As to the first matter, yes, Amazon is spending a ton of money on AI technology that may or may not pay for itself by virtue of maintaining Amazon Web Services' market share, or its profit margins. But the market may be underestimating the potential of what Amazon's been developing with its invested capital of late.
Case in point: The company's new Graviton5 processors power its EC2 M9g cloud-based servers built for general-purpose workloads. This platform provides cost-effective compute performance that's 25% better than previous-generation technology, and an even bigger performance improvement for databases and web-based apps.
The processor and its applications in and of themselves aren't exactly mind-bending, to be clear; other companies are making comparably performing technology. What's impressive is that Amazon -- which isn't exactly known as a hardware developer -- is successfully coming up with its own powerful computing solutions that don't leave it dependent on chip suppliers like Nvidia, or more recently, Alphabet. It's not been a cheap developmental effort. But, it's arguably been worth it.
The e-commerce powerhouse is also surprisingly far along with the development of agentic AI, by the way. Cybersecurity outfit Trend Micro and credit bureau Experian are just a couple of the organizations that have selected AWS's AI-powered agent-building tools, making Amazon a legitimate contender in this fast-growing sliver of the AI industry.
As for Amazon's e-commerce business, it's not so much running into a headwind as it's simply being rethought. Specifically, Amazon.com (and all of its derivatives serving foreign markets) is no longer just a platform to sell merchandise. The platform's massive scale and the web traffic it draws every single day can be monetized in an even better way. That's advertising -- Amazon's sellers are willing to pay to prominently feature their products at the website. The company's collected more than $47 billion worth of this high-margin ad revenue through the first three quarters of this year alone, which is not only up 20% year over year, but more than its e-commerce operations combined produced in operating income for the entirety of last year.
This is still just the beginning, however. Forrester Research predicts the worldwide retail media advertising market is poised to grow from $184 billion this year to $312 billion by 2030. Amazon's sheer scale means it's positioned to capture at least its fair share of this growth.
Sooner is better than later
The big challenge here may simply be that these developments are as difficult to see as they are to understand. They admittedly transform Amazon from a relatively straightforward business to a more nuanced, complicated one. Investors tend not to like that.
Give it time, though. These initiatives are already making a mostly positive impact on the company's bottom line, and should continue doing so into the foreseeable future. The market will connect the dots soon enough.
In fact, the market may already be connecting these even if the stock seems like it's lagging right now. Once more investors start to appreciate what Amazon is becoming and how well it's doing, this ticker could quickly catch up with its "Magnificent Seven" peers.
