The Way Forward For Amazon
Amazon Deep Dive Part III
Today, we’ve arrived at the final part of our Qualitative research on Amazon. Normally, this is the point where I’d dig back into the numbers—running a fresh check on the balance sheet and income statement before moving forward.
But today, we’re switching things up.
Why?
Because, let’s be honest, I don’t need to convince anyone that Amazon is currently a top-tier company. If you’re still skeptical, go read Part I of this deep dive—it lays out exactly why Amazon is such a powerhouse.
The real danger with companies of this quality isn’t whether they’re good—it’s whether they can live up to the sky-high expectations the market has already priced in.
That’s why today, we’re looking ahead. We’re diving deep into Amazon’s future: sharing our own expectations, segment by segment, step by step.
And next week? We’ll take these expectations and build them into a full valuation model. We’ll finally ask the big question: is the market being too optimistic about Amazon’s future—or are investors actually underestimating what’s coming?
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Here’s how today’s article is structured: first, we’ll look at growth across Amazon’s key segments; then, we’ll break down how margins are evolving; and finally, we’ll briefly explore the potential risks that could derail both that growth and margin expansion.
Alright, let’s jump in.
Growth
AWS
Let’s start with the crown jewel: AWS. While most people know Amazon for its online retail empire, for investors, AWS has long been the true engine behind Amazon’s profits. It was, is, and remains the core driver of Amazon’s growth and profitability.
Even though AWS’s growth rate has naturally slowed as it’s become bigger, the overall cloud market is still expanding and Amazon with it. Between 2014 and 2023, AWS’s revenue grew at an astonishing 37% CAGR. In 2024, AWS revenue climbed another 19%, hitting $108 billion.
The outlook? Solid. Over the next 5–10 years, analysts are calling for AWS to keep growing at low double-digit rates, even as the cloud sector matures. And let’s be clear: there’s still fuel in the tank. Cloud adoption is far from maxed out, and emerging trends like generative AI and machine learning are only pushing demand higher.
Ads
Next up, Amazon’s most underrated powerhouse: advertising. Yes, you read that right—ads come in ahead of e-commerce here. Why? Because this is Amazon’s fastest-growing major segment, and frankly, it’s still only getting started.
In 2024, ad revenues surged 20% to $56.21 billion. That’s massive. It cements Amazon as one of the world’s top digital ad players, right up there with Google and Meta. And the growth drivers? They’re everywhere: retail media (those sponsored products all over your Amazon search results), Fire TV, Twitch, Freevee, and now—Prime Video. Yup, in 2024, Amazon started rolling out ads inside Prime Video content, giving subscribers the option to pay extra to go ad-free.
Will this growth keep up? It’s tough to say. Amazon’s disclosures here are notoriously vague, making it hard to predict exact numbers. But reasonable estimates suggest solid double-digit growth for at least the next five years, even if the breakneck pace cools slightly as the business scales.
Online retail
Ah, the core business—the e-commerce empire that made Amazon famous. How’s it holding up?
Pretty well, actually. In 2024, North American retail revenues climbed around 10%. Globally, e-commerce penetration is still rising, with forecasts calling for 8–15% annual growth through the late 2020s. Given Amazon’s size, they’ll probably land toward the lower end of that range, but hey—when you’re this big, even single-digit gains move the needle.
The key growth levers? Third-party sellers and new product categories. Marketplace services—Amazon’s cut from commissions, ads, and logistics—remain a major revenue booster. That said, growth slowed to 7% year-over-year in Q1 2025, so it’s definitely worth watching. On top of that, Amazon is also aggressively expanding internationally, opening up new markets that could drive long-term revenue growth—but also introduce fresh operational and competitive risks.
One often-overlooked gem here is Amazon Business—the B2B marketplace. This thing is expanding fast. In 2023, it already pulled in over $30 billion in North America alone, and projections suggest it could pass $65 billion by 2026.
Alright, now that we’ve laid out the big growth stories, let’s get into what really matters: how all this translates into margins—and where the risks might be lurking.
Margins
Amazon’s margin story has always been a bit of a paradox. On paper, you’ve got a trillion-dollar giant, a household name, a tech powerhouse—and yet for years, it’s operated on razor-thin profits. Why? Because Amazon has always been a volume-driven, reinvestment-hungry machine. But here’s where things get spicy: the profit engines inside Amazon are shifting, fast.
Let’s break it open.
AWS: The Undeniable Cash Cow
AWS isn’t just a side business; it’s the business when it comes to profits. In Q1 2024, AWS brought in less than 18% of total revenue but coughed up over 60% of Amazon’s operating income. That’s because AWS runs on plump 30–35% margins. Even if cloud growth cools a bit, this division’s operating leverage remains a key pillar. Without AWS? Amazon’s overall profit story looks a lot less impressive.
Advertising: The Secret Weapon
Amazon rarely shouts about its ad business, but maybe it should. This high-margin segment is quietly transforming Amazon’s margin profile. In 2024, advertising pulled in over $56 billion—and most of that drops straight to the bottom line. As ads take up a bigger slice of the revenue pie, they help offset the traditionally weak retail margins. Bonus: subscription services like Prime add another layer of juicy, recurring profit.
Retail: Leaner, But Still a Grind
Here’s the tough love: Amazon’s e-commerce arm has been a drag on margins for years. Low prices, relentless reinvestment, cutthroat competition—it’s a tough game. But there’s been progress. North American retail margins jumped from barely 1% in early 2023 to over 6% by year-end, thanks to smarter logistics and the halo effect of advertising. That’s a big improvement, but let’s not kid ourselves: retail is never going to hit AWS-like margins.
International retail? Even trickier. Amazon’s still in expansion mode globally, burning cash to win market share. The hope is that, eventually, international markets will mature and start pulling their weight on the profit side. But that’s a longer-term play, not a near-term fix.
The Bigger Picture
Here’s the optimistic view: Amazon is evolving into a higher-margin business—not because retail is magically transforming, but because the profit engines (AWS, ads, subscriptions) are growing faster and lifting the whole ship. Analysts now project operating margins topping 10% by 2025, up from a dismal ~2% in 2022.
But here’s the real talk: margins on a spreadsheet look great. Margins in the real world? They’re constantly under attack—from rising costs, competitive pricing, geopolitical risks, and shifting consumer habits. Amazon may be getting leaner and more profitable on paper, but whether it can hold that line in the face of real-world pressures is still very much an open question.
Ready to dig into the risks? Let’s go.
Risks
Let’s talk risk—the stuff that could punch holes in even the most optimistic Amazon bull thesis.
Brutal Competition on All Fronts
Amazon isn’t just battling one set of rivals. It’s fighting wars on multiple fronts. In cloud, Microsoft Azure and Google Cloud are gunning for AWS’s market share, and they’re growing faster. AWS’s slowdown to ~17% growth shows that customers are diversifying providers or negotiating harder.
On the retail side, it’s under attack from traditional giants like Walmart and Target ramping up online, plus Shopify giving brands direct-to-consumer alternatives. Internationally, Amazon faces tough local champions—Alibaba, MercadoLibre, Flipkart—who know their home markets better. Add in the rise of social commerce and niche online sellers, and Amazon’s moat looks a lot less unbreakable.
Even in advertising, Amazon is up against the giants: Google, Meta, TikTok, and emerging retail media networks. That said, they are still well protected by the customer loyalty they’ve built over years—Prime members, repeat shoppers, and AWS enterprise clients who stick with Amazon because of the ecosystem and trust they’ve developed.
And logistics? UPS, FedEx, DHL are not backing down. All this competitive pressure forces Amazon to cut prices, ramp up marketing, or accelerate investment—moves that can hit both growth and margins hard if execution slips.
Global Brand Limits
Let’s be honest: outside North America, Amazon isn’t always the king. In Europe, it arrived late, giving space for strong local players like Bol.com (ask anyone in Belgium or the Netherlands).
It’s no guarantee that Amazon can replicate its North American margin improvements abroad—the brand and market dynamics just aren’t the same, and importantly, the deep customer loyalty Amazon enjoys in its home region might not carry over as strongly internationally, making it harder to push margins as high.
Macro and Market Shocks
Amazon is tightly linked to global economic trends. A recession or consumer pullback hits both e-commerce and ad spending—two key pillars of Amazon’s revenue. In the B2B space, companies cutting IT budgets or optimizing cloud use (as seen in 2023) can put a serious dent in AWS growth. Rising inflation and interest rates squeeze both sides: customers have less money to spend, while Amazon faces higher wage, fuel, and transport costs. Plus, a strong U.S. dollar cuts into reported international earnings. Over the long term, slowing growth in big markets like Europe or the U.S. makes it harder for Amazon to keep delivering double-digit top-line growth.
Execution Risk and Cost Control
Amazon’s ambition is its strength—and its burden. Running a sprawling empire takes enormous capital and precise execution. Overbuilding is a real risk: during COVID, Amazon doubled its capacity, only to face underused warehouses and staffing cuts once demand normalized. Missteps like this can swing financial results wildly.
And while under-investing might sound safer, it risks hurting the customer experience during demand spikes.
Meanwhile, Amazon’s “big bets”—from Project Kuiper to Alexa to original Prime Video content—require billions in upfront costs with no guaranteed payoff. History shows Amazon is willing to tolerate long periods of losses in the name of growth or strategic positioning, but not every moonshot delivers. Just ask the Alexa team after the 2022 restructurings.
Bottom line: Amazon’s scale and ambition create huge opportunities, but they also make the company vulnerable to missteps, shocks, and relentless competitive attacks. Keeping all this in mind will be crucial as we step into the valuation phase next week.
Closing Remarks
So where does this leave us? Amazon stands at a fascinating crossroads. On the one hand, it’s a profit machine powered by AWS and advertising, increasingly leaner and smarter in its retail operations, and protected by a fiercely loyal customer base. On the other, it faces intensifying competition, international challenges, and the constant threat of macroeconomic shocks. For investors, the real question is no longer whether Amazon is impressive—it’s whether that strength is already fully priced in, or if the market is still underestimating what’s coming next.
Next Sunday, we’ll wrap up this deep dive with the grand finale: our valuation of Amazon. We’ll break down the numbers, test the assumptions, and ask the million-dollar question—does Amazon’s stock still offer upside, or are we staring at a fully valued giant? Trust me, you don’t want to miss it.
📢 What’s your take? Are you bullish, bearish, or somewhere in between on Amazon’s future? Drop a comment—I’m curious to hear your thoughts.
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