To The Moon

$Amazon.com(AMZN)$

We've just come off the worst week for the S&P 500 in 2025 so far, with nearly every sector in the red. Today, we're focusing on Amazon, which, like much of the stock market, took a hit last week, dropping around 6%.

Year-to-date, many companies are struggling, though a few have posted gains. However, Amazon, following the broader trend of the "Magnificent 7" underperforming, is down nearly 10% in 2025. Unfortunately, this week isn't starting on a positive note either, as global stocks continue to decline. Wall Street expects last week's downturn to persist, with fear and greed indicators sitting at an extreme fear level of 19.

Despite this, Amazon's current premarket value of $196 might present a strong buying opportunity. Quant ratings, Wall Street analysts, and Seeking Alpha all signal Amazon as a strong buy. The stock is trading in the mid-to-lower range of its 52-week span, making it worth considering—especially given its 133% gain over the past year and a staggering 975% increase over the last decade, significantly outperforming the S&P 500.

That said, is this a golden opportunity or a potential trap?

Institutional investors seem to lean bullish, holding about 72% ownership. While they sold $46 billion worth of shares last year, they purchased nearly three times that amount in the most recent quarter.

Insider ownership is also relatively high at 11%, with $22 billion worth of insider selling. In Q1 alone, 23 million shares were sold, including significant transactions from the CFO, CEO, and senior vice president in February, each netting around $3–4 million. However, insider sales aren't necessarily bearish, as they can be driven by personal financial reasons.

We'll explore why it still earns a strong double-buy recommendation. Yes, it trades at a 103% premium to the sector median—something expected for high-quality companies—but historically, its valuation tells a different story. Over the past five years, Amazon's forward P/E ratio averaged 176, whereas today, it sits 82% lower. No matter which valuation metric you use, Amazon is trading at a premium compared to the sector but at a significant discount relative to its historical norms.

Amazon's Strong Financial Performance

Looking at Amazon’s most recent quarter, total revenue increased by 10% year-over-year. The company's fastest-growing segment, AWS, rose by 19%, while its second-fastest-growing division, advertising, saw an 18% jump. Although AWS growth has slowed in recent quarters, it remains strong, with 2024 growth ranging between 17-19%. Amazon also continues to dominate the cloud infrastructure market, holding a 30% global market share, compared to Microsoft's 21% and Google Cloud’s 12%. The overall sector is expanding at a rate of 22% year-over-year, with consistent growth in both revenue and operating income.

One key factor in Amazon’s investment strategy is its aggressive capital expenditure. The company is projected to spend $100 billion this year, calling AI a "once-in-a-lifetime opportunity." This aligns with a broader industry trend, as competitors like OpenAI and Alphabet are also heavily investing in artificial intelligence. Historically, Amazon has led in capital expenditures, and 2024 is expected to be no different, with Microsoft following at $80 billion.

For investors, a critical metric to watch is return on invested capital (ROIC), which reflects how efficiently a company deploys its capital. Amazon’s ROIC currently sits at 16%, up from 10% in the previous year—exceeding the 10% threshold that indicates strong capital allocation by management.

Amazon's advertising segment, its second-fastest-growing business, generated $17.3 billion in revenue. While this is lower than Alphabet’s YouTube ($10.5 billion) and Google Search ($54 billion), it signals room for further expansion. In the most recent quarter, Amazon outperformed earnings expectations, posting an EPS of $1.86 versus the forecasted $1.49. Revenue also slightly exceeded expectations at $17.7 billion, compared to the anticipated $17.3 billion. AWS revenue came in at $28.8 billion, in line with estimates, while advertising slightly missed projections at $17.3 billion versus the expected $17.4 billion.

Strategic Investments: A Positive Outlook

Looking ahead, Amazon is expected to maintain double-digit growth over the next four quarters, with a projected EPS of $6.33 for December 2025. This gives it a forward P/E ratio of 31.5. Growth remains strong, earning an A- rating, with year-over-year revenue growth projected at 10-11%, well above the sector average in the low single digits. Over the past five years, Amazon has grown revenue at an average rate of 20%, with EPS growth of 17.7%. Future EPS growth over the next 3-5 years is estimated at 21%, surpassing the sector average of 11% but slightly below Amazon’s historical 31.2%.

Amazon has achieved double-digit top-line growth in nine of the last ten years, including an 11% increase in 2024. Profitability remains strong, with an A+ gross margin of 49%, well above the sector average of 38% and Amazon’s five-year average of 43%. Net profit margins have also improved, approaching 10%, compared to both the sector and Amazon’s five-year average of 4-5%. This suggests growing operational efficiencies alongside revenue growth. Additionally, Amazon's cash from operations reached $116 billion, nearly double its five-year average of $64 billion and significantly surpassing the sector average of $282 million.

These strong financials, along with Amazon's leadership in cloud computing, advertising growth potential, and AI investments, make it a compelling stock to watch for long-term investors.

Amazon's Financial Strength

In terms of margins, we always highlight the importance of operational efficiencies. Amazon has demonstrated solid improvements in this area. In 2015, the company’s operating margin was just 2%, but it has since grown to 11%. Their free cash flow has consistently hovered around the 5% mark, which is considered the bare minimum we’d like to see for healthy financials. We also focus on the net debt-to-EBITDA ratio to gauge the strength of a company's balance sheet. Ideally, this ratio should be below three, which represents the number of years it would take for a company to pay off its debt, net of cash on hand. Currently, Amazon's ratio sits at 3.4 on a trailing 12-month basis, but it is expected to decrease over the next year, signaling a strong balance sheet.

Walmart's Rising Threat

Another factor to consider is the competitive threat posed by Walmart, which has quietly been positioning itself as a formidable competitor to Amazon. Last year, Walmart delivered 5 billion same-day items, doubling its performance from 2023. Although Amazon doesn’t release comparable figures, it’s evident that Walmart is excelling in specific areas, even outpacing Amazon in some of them. When we look at global e-commerce sales among the top 2,000 North American retailers, Walmart's share has significantly increased from 4.4% in 2017 to a noticeable jump in 2024, while Amazon’s growth has slowed. The question is, how much stronger can Walmart get, and could it become a serious threat to Amazon in the long run?

Valuation Insights

Now, turning to Amazon's valuation, we derived an intrinsic price of $230 using the Discounted Cash Flow (DCF) model. The free cash flow growth has varied over the years, but moving forward, we’ve estimated a more conservative 20% growth rate, which falls at the low end of our range (low, medium, and high). Using this assumption, we calculated the present value of future free cash flows and terminal value, adjusted for cash and debt, to arrive at an equity value. Dividing by shares outstanding, we see a target price of $230, indicating 177% upside potential. For full transparency, at the 25% growth scenario, the target price is $325, which indicates 66% upside. At a 30% growth rate, the price reaches $454, showing more than a double from the current value.

However, these numbers are subjective, so if you adjust the growth rate to 18%, for example, the intrinsic value would fall just under $200, which aligns closely with Amazon's current trading price, implying that 18% growth is already priced in. For today's episode, we are using the more conservative 20% growth assumption.

We apply a margin of safety (MOS) to our valuation model. Starting with a 10% margin, we assess the stock against three golden criteria: a wide economic moat, strong financial metrics, and positive forward-looking data. If Amazon meets these criteria, a buy signal is valid at around $227, and the stock remains attractive at up to $196 based on a 15% MOS. Wall Street has set a 12-month price target of $270, indicating 38% upside potential.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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