Shares of Amazon (NASDAQ:AMZN) soared late last week, bringing the stock’s trailing 5-day return to an impressive 8.9%. While AMZN has gained about 31% over the last 12 months, its returns have trailed those of other Magnificent Seven stocks like NVIDIA and Alphabet. Why did Amazon go up so much, and could now be the time to buy the stock for more returns going forward?
Amazon Net Sales Up 13%
The highly positive Q3 earnings report sparked the rally after net sales popped by 13% to over $180 billion. AWS cloud computing was the shining light as is often the case, and it grew by 20% over the year-ago period. North American and international eCommerce sales, however, also saw strong growth rates of 11% and 14%, respectively.
Net income also increased dramatically, rising from $15.3 billion in the year-ago quarter to a Q3 total of $21.2 billion. This translated to earnings of $1.95 per share, a significant beat compared to the consensus estimate of $1.57. This substantial earnings beat also contributed to the sudden increase in Amazon’s share prices following the report.
Unsurprisingly, AI was a major driver in Amazon’s Q3 growth, as the online commerce giant has positioned itself to take full advantage of the emerging technology. Highlights from the third quarter included ongoing adoption of Amazon’s custom Trainium2 AI chip and the ongoing buildout of cutting-edge computing hardware. Amazon also continues to add new AI tools to AWS, integrating many of the leading LLMs being developed by other AI majors.
Looking forward to Q4, management expects revenue growth to stay in the double-digit range at 10 to 13%. Amazon has also raised its estimate for 2025 CapEx spending to $125 billion, up from the previous guidance of $118 billion. This places Amazon above the likes of Microsoft and Alphabet in terms of spending on AI infrastructure, and there’s expected to be more room for additional spending growth in 2026.
Amazon’s 30% Market Share Down
As noted above, higher-than-expected spending on AI growth accounts for part of Amazon’s sudden surge in share prices after the Q3 earnings report. To understand this and how it impacts the business’s long-term value, it’s useful to briefly examine Amzon’s somewhat unique strategy with respect to AI.
AWS is the most obvious beneficiary of AI, as Amazon is integrating multiple models to build world-class tools for its customers. Unlike businesses such as Alphabet and OpenAI that are focused mostly on building their own AI models, Amazon allows its customers to access a variety of LLMs through its Bedrock platform. This approach lets Amazon profit from AI innovation at multiple partner businesses instead of relying solely on its in-house AI resources. Meanwhile, Amazon’s position as a leader in AI tools is supported by its moat in cloud computing, a market in which it boasts a roughly 30% global market share.
In addition to the value AI can add for Amazon’s AWS customers, the eCommerce giant itself is also making significant use of the technology. Amazon’s AI-enhanced recommendation engine, for instance, now plays a role in an estimated 35% of sales on its eCommerce platform. Ongoing refinements of this engine and other customer-facing AI tools have the potential to keep driving more sales for Amazon’s core online commerce business.
Amazon has even deployed AI to significant effect in its logistics and operations. Already known for its use of robotics in fulfillment centers, Amazon has also been testing AI systems that can help human workers improve efficiency in its warehouses. The business is even testing out an AI-powered robot called Proteus that could work independently alongside human staff to sort and move packages through Amazon’s facilities.
Cumulatively, Amazon’s strategy of using AI to drive growth in its existing businesses while also positioning itself as a leading provider of cloud AI services could be a long-term winner. Even with competition in the AI space quickly heating up, Amazon’s scale as a cloud service provider and its ability to deploy the technology within its own eCommerce business could help it realize solid long-term returns on the investments it makes in AI today.
Is Amazon Still a Buy?
Although Amazon’s valuation is high by the standards of most businesses, the combination of long-term growth prospects and an extremely strong moat may make it worth paying for. Shares of AMZN currently trade at 37.3 times earnings, 3.9 times sales and 7.8 times book value. Even so, the analyst consensus price target of $287.57 implies an upside of almost 13% from the most recent price of $244.22. Even more encouraging is the fact that the current price is only barely above the lowest price target of $240.
Amazon also has the advantage of having become decently profitable. Over the last 12 months, net margin has come in at 10.5%. As evidenced by Q3’s results, earnings have the potential to grow quickly as revenues rise and margins expand. Over the coming 3-5 years, analysts are expecting annualized EPS growth of approximately 19% from Amazon. Ongoing expansion of AWS is likely to support this enhanced profitability, as Amazon’s cloud computing business offers both high margins and a long runway to keep scaling up.
Thanks to the majority of its revenues still coming from the eCommerce side of its business, Amazon may also be an appealing play on AI that may not be as risky in the event of an AI stock selloff. With valuations running high and even Jeff Bezos acknowledging the strong possibility of a bubble forming around AI stocks, Amazon’s ability to support its share price with a more conventional business may offer it some protection if the market’s enthusiasm for artificial intelligence declines.
Overall, Amazon is likely still a good long-term stock to buy and hold for both its growing strength in AI and for its established eCommerce business. Even with a somewhat lofty valuation, the quality of Amazon’s business and the strength of its moat likely make it a fair value with significant room for further appreciation as revenues and earnings continue to grow.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.