Intro
What was intended to be a short summary of the reasons why I have been a long-term shareholder of Amazon for many years and a buyer at the current levels turned into a longer article. Enjoy!
Before we dive into the article, I want to thank you all for participating in this journey. The last months have been fantastic, and our portfolios have been growing steadily. At least that’s what I can say for mine. If you follow me and you invest alongside my ideas, you should have a more than satisfying performance as well.
ASML 0.00%↑ has been performing incredibly well, and I mentioned it more often than I can count in my best buys article. The most recent one was in September, and since then alone ASML has increased by a staggering 31%.
With the news from today that OpenAI will buy a ton of GPUs, AMD 0.00%↑ has been performing really well, too. You will find my deep dive from December here. If you joined along the journey, you are up some happy 67%. Congrats and enjoy the gains :)
Having finished our victory lap and gracious dances, let’s be humble and acknowledge that the market has gone far and that there are hardly any cheap stocks left. Of course, there is still Adobe, ADBE 0.00%↑ which is dirt cheap given the characteristics of the company, but according to the popular consensus, Adobe is dead, and the stock should trade at a negative $10 - sarcasm off. I wrote about it here:
The Magnificent 7
Which brings me to the main point of today’s article: Amazon. Having said that, let’s have a look at today’s main star.
I am sure you know Amazon AMZN 0.00%↑ and I would be shocked if you told me that you have never ordered anything from Amazon. Amazon is the largest e-commerce company in the Western world by a mile.
If you want to know who dominates in South America, make sure to have a look at Mercado Libre MELI 0.00%↑, a company that I covered in detail here. A truly fantastic company in its own right.
The Magnificent 7 are now these wizards below, but the term refers to the largest US tech companies, consisting of Amazon, Tesla, Alphabet, Meta, Apple, Microsoft, and Nvidia.
The shares of AMZN 0.00%↑ have been flat YTD, and only Apple AAPL 0.00%↑ has shown a similar lackluster performance of the Magnificent 7. Please don’t ask me why TeslaTSLA 0.00%↑ is included. Tesla investors will sooner or later discover that trees don’t grow to the sky and that Tesla has a very different profile than the other companies. Apple has been trading at a high premium for the last years and has lost quite some ground in terms of AI to the other companies.
The real tech titans (apart from Amazon) have all gained >20% YTD. As the smart investor that you are, you know that stock prices are nice to look at, but just a minor piece of the larger puzzle. We are interested in the business performance of the company underlying the stock and also the valuation.
Let’s therefore look at how the forward P/E of the Magnificent 7 has developed over the last years.
You can’t really see too much since Tesla is trading at a stupidly high valuation. Let’s therefore ignore Tesla. Excluding Tesla, the picture becomes clearer. GOOGL 0.00%↑ is still the cheapest of the bunch, with META 0.00%↑ at a similar level. MSFT 0.00%↑ NVDA 0.00%↑ and Amazon all trade in the low 30s.
Why then, dear author of this publication, are you writing about Amazon?
Amazon the business
Let’s keep the main segment, the online store, as a given. You know it, you love it, and you will order (too) much there. Because of the fantastic lock-in effect called Amazon Prime, you don’t pay shipping for a single order. Due to this, Amazon is usually the cheapest retailer when you sum the item price and the shipping costs. You buy yourself this privilege by paying an annual membership fee. There are 200 million Prime subscribers worldwide, a nice and steady income for Amazon.
Jeff Bezos designed it perfectly, and he followed his great mentor, James Sinegal, the founder of Costco, in setting it up. COST 0.00%↑ is one of the best companies out there, but has been trading at a premium (rightfully so) ever since.
Logistics
Amazon is so much more than just your online store. In 2025, an estimated 407 billion packages will be shipped worldwide. The average American had 66 packages shipped alone.
Did you know that Amazon is already the second-largest carrier in the US and the only one of the large carriers that has actually grown its volume since 2022? Amazon came out of nowhere and turned one of its cost centers (shipping via the US Postal Service or UPS/FedEx) into a profit center. By 2028, Amazon Logistics could be the largest carrier in the US.
Many companies now rely on Fulfillment by Amazon. All those warehouses, trucks, and even planes that you can see are there for a reason. The main goal is to increase the moat and build an empire.
Advertising
I am sure that you have seen all those “sponsored” tags when you are looking for products on Amazon. If not, you are welcome, for I just opened your eyes. Companies pay a lot of money to be featured at the very top. Another thing you can see: Whatever product works and can be cheaply manufactured, Amazon takes over and offers under its own brand. In the image below, that is the kettle on the very left.
The advertising is also done in Amazon Prime (and boy, do they know you well) and on other pages across the website. Companies also pay for their article descriptions and the photos and videos you can see when you click on an article.
Advertising has the lovely characteristic that it is a very high-margin business. The Amazon advertisement segment has indeed become the third largest advertiser behind Alphabet (Google, YouTube, …) and Meta (Facebook, WhatsApp, Instagram…). Amazon knows what you buy, what you search for and haven’t bought yet, the movies and series that you like, and, in case you have an Alexa device, they also know a lot more about you than you would like to acknowledge
AWS
Three letters and the darling of anyone investing in Amazon. If you're a regular Amazon customer, you probably don’t know much about it. AWS stands for Amazon Web Services. In short, AWS allows you to rent computing power and storage online without having to build up the whole infrastructure.
That’s how Jeff Bezos described AWS in the 2006 shareholder letter. I highly recommend that you read them all; they are a real treasure if you want to learn more about investing and running a business.
Amazon Web Services is another example. With AWS, we’re building a new business focused on a new customer set … software developers. We currently offer ten different web services and have built a community of over 240,000 registered developers. We’re targeting broad needs universally faced by developers, such as storage and compute capacity—areas in which developers have asked for help, and in which we have deep expertise from scaling Amazon.com over the last twelve years. We’re well positioned to do it, it’s highly differentiated, and it can be a significant, financially attractive business over time.
Jeff Bezos is a visionary. I am still not sure if he could have foreseen the growth of AWS. Amazon dominates the market, holding a 30% share, ahead of Microsoft’s Azure platform and Google Cloud.
While AWS revenue is $116 billion, which is 17% of Amazon’s overall $670 billion revenue (talking about large numbers), the profitability is much higher. AWS operating income contributes 56% ($42.8 billion of $76.2 billion) of Amazon’s total operating income.
AWS's growth will accelerate thanks to its partnership with Anthropic. Anthropic has been scaling on AWS, and this will show in the future AWS numbers.
Chances
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