Amazon stock (NASDAQ: AMZN) has done well this year, up over 30% so far. With a current market value of just under $200, the share is trading around 5% below its fair value of $210 – according to Trefis estimates Amazon's rating. In this analysis, we take a look at some of the potential opportunities and risks for Amazon and help investors decide whether to buy, hold, or sell the stock. See also: What's happening to Google Stock?

Amazon has spent years building its vast empire, investing heavily in data centers, e-commerce infrastructure and logistics. Investors also had to watch patiently as the company expanded at the expense of short-term profits. Now it's remarkable to see Jeff Bezos' vision unfold, as these long-term investments finally appear to be paying off. Amazon's profitability is improving as the company benefits from fast-growing areas such as generative artificial intelligence, which have fueled the expansion of Amazon Web Services. Increasing digital advertising sales and improved cost management also increase margins.

However, the stock has risen almost double in the last two years, suggesting that some of the positives are likely priced in. Notably, Amazon stock returns have been more volatile, at 2% in 2021 and -50% in 2021, than those of the S&P 500 in 2022 and 81% in 2023. In contrast, the Trefis High Quality Portfolio is a collection of 30 stocks significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. less of a rollercoaster ride, as the key performance indicators of the HQ portfolio show.

Things Amazon did right

Infrastructure investments pay off

Amazon has done a lot of hard work for years: building the cloud and e-commerce infrastructure. And these big bets are finally paying off. For example, Amazon reported a 55% year-over-year increase in operating profit to $17.4 billion in its most recent quarter, well above the upper limit of its $15 billion forecast. Amazon's massive fulfillment centers and delivery systems are difficult for competitors to match – giving the company a significant lead in speed and lower operating costs. In addition, Amazon was able to better retain customers through perks such as Prime offers, free shipping and Prime Video. It may take years for competitors to replicate these investments, creating a protective moat around Amazon's business that is increasingly evident in rising margins.

Amazon is also more confident about its value proposition and pricing strategies. Both North American and international retail stores reported improved margins, driven by better cost management, seller policy optimizations and higher fees. This is particularly impressive considering the retail environment has weakened in recent months amid a mixed economy.

Advertising expansion

Amazon is also growing rapidly in the advertising space and is becoming a preferred platform for marketers to target potential buyers. Its digital advertising segment generated $14.3 billion in revenue – a 19% increase from a year ago – and accounted for 9% of total revenue last quarter. Although Amazon does not provide any information about the profitability of this business, advertising is usually very lucrative. Amazon ads have an advantage because users are often actively shopping on the platform, increasing the likelihood of ads converting into sales, compared to, for example, Google, which targets a more general search audience. Additionally, Amazon's superior shopping and browsing data could enable better ad targeting. The integration of ads into Amazon's marketplace also makes it easier for users to purchase products without having to leave the platform.

The assessment looks more realistic

Amazon shares are increasingly seen as fair value. While the company has historically traded at negative or triple-digit price-to-earnings ratios, its valuation metrics are improving. The company's stock is currently at about 42 times 2024 earnings and about 34 times consensus 2025 earnings.

Although revenue growth may be slowing, Amazon's margins are clearly on an upward trajectory. While Amazon is expected to increase its capital spending to a total of $75 billion this year (up from about $48 billion last year), it will primarily support technology infrastructure to meet increasing demand for artificial intelligence. This focus on higher-yield investments in technology instead of lower-yield e-commerce infrastructure could also increase margins in the future.

Additionally, Amazon has implemented effective cost management strategies, adopted a more measured pace of hiring, and increased operational efficiency. Notably, AWS, Amazon's cloud division, reported operating income of $10.4 billion, a notable 50% year-over-year increase and well ahead of its 19% revenue growth.

Things that could hurt Amazon in the near future

AWS

Amazon's AWS remains the company's biggest profit driver, accounting for over 70% of total operating income in the first nine months of this year. However, we are currently seeing some threats to the cloud business. Microsoft Azure and Google could gain a lead in the AI ​​competition. Microsoft has made significant investments in AI, including its deep partnership with OpenAI, which will likely strengthen its Azure cloud services. Likewise, Google Cloud's generative AI offerings could also find traction as the company expands its services. Customer loyalty to AWS may decrease with the increase in options such as containerization, which makes it easier to transfer an organization's entire tech stack between providers. This makes it easier for companies to switch cloud providers and reduces their dependence on a single provider. Increasing portability and standardization of services could lead to cloud computing becoming even more commoditized, meaning companies like Amazon could face pricing and margin pressure while potentially being forced to make more capital investments. Both Azure and Google Cloud experienced a growth spurt in the third quarter, AWS growth remained steady at 19% and remained flat compared to the second quarter.

E-commerce competition on multiple fronts

Amazon's e-commerce business is facing challenges. Chinese companies like Temu and Alibaba compete directly with Amazon, offering products at bargain prices shipped directly from China and are becoming increasingly popular with customers in the U.S. and abroad. The prices are low, the product selection is huge and delivery times are getting shorter and shorter. Even legacy retailers like Walmart Costco and Target Corporation have invested significantly in their digital strategies and omnichannel offerings – integrating the customer experience across all channels, including physical stores, online platforms and apps. Specialty retailers like Best Buy are also becoming more competitive on price, offering price matches and aggressive discounts. This could be a problem for Amazon since its e-commerce business still accounts for over 80% of its total sales.

Regulatory Issues in the United States and Abroad

While Google is the most prominent target of the current regulatory crackdown against big tech companies, Amazon is also battling legal challenges of its own. In a major lawsuit filed last year, the Federal Trade Commission and 18 states accused Amazon of abusing its market dominance to drive up prices, overcharge sellers and stifle competition. This lawsuit, one of the largest in Amazon's history, is scheduled to go to trial in October 2026. Outside the US, Amazon also faces regulatory hurdles abroad. Earlier this year, the company was forced to abandon its planned acquisition of robot vacuum cleaner maker iRobot after the European Union raised objections, further highlighting increasing global scrutiny of Amazon's business practices.

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