Amazon: A Platform That Compounds

Amazon is one of the largest companies in the world, operating across online shopping, cloud computing, advertising, and digital services. From its marketplace and Prime membership to Amazon Web Services, which powers a large part of the internet, the company combines everyday consumer use with stable business revenue. With continued investments in artificial intelligence, logistics, and media, Amazon keeps expanding how people shop and how companies run their technology. The question remains: Does this platform giant deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Amazon at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Amazon, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Amazon is a multinational technology company headquartered in Seattle operating across e-commerce, cloud computing, digital media, devices, and advertising. Although commonly associated with online retail, the company has evolved into a diversified infrastructure platform serving consumers, merchants, enterprises, developers, advertisers, and content creators. Its operations are organized into three reporting segments: North America, International, and Amazon Web Services. At the consumer level, Amazon operates online and physical stores offering a very large assortment of products across many categories. Products are sold both directly by Amazon and through third-party sellers who pay commissions and fulfillment fees to access the platform and its logistics network. The company complements retail activity with subscription services such as Prime, which bundles fast shipping, digital content, and exclusive offers in order to increase engagement and repeat usage. Amazon also develops consumer electronics including Kindle, Fire TV, Echo, Ring, and Eero devices. These extend the shopping interface into households and integrate purchasing, media consumption, and smart-home functionality. In parallel, Amazon produces entertainment content distributed through Prime Video and related channels. The company operates a large digital advertising platform where merchants and brands promote products directly at the point of purchase intent, creating a high-margin layer on top of marketplace traffic. The most economically important division is Amazon Web Services, which provides on-demand computing, storage, databases, analytics, and artificial intelligence services to organizations ranging from startups to governments. While representing a smaller share of revenue, AWS generates the majority of operating income and transforms Amazon from a retailer into a global technology infrastructure provider. In practice, consumer commerce attracts users into the ecosystem while cloud computing and advertising generate most profitability and cash flow. Amazon’s competitive moat is built on a system of reinforcing advantages that combine brand trust, ecosystem lock-in, logistics scale, network effects, data advantages, and the ability to fund continuous reinvestment through high-margin cloud computing. The company is among the most recognized and trusted brands globally, and its consistent focus on low prices, convenience, and reliability leads to high repeat usage. Prime membership deepens loyalty by embedding shopping, entertainment, and digital services into daily routines, making usage habitual rather than transactional. Amazon operates one of the most advanced logistics networks in the world, enabling fast delivery and cost efficiencies that competitors struggle to match. Scale lowers per-unit costs and allows the company to offer both speed and competitive pricing simultaneously, strengthening customer retention. The marketplace creates a powerful network effect in which more customers attract more sellers, more sellers expand selection and competition, and better selection and pricing attract additional customers. Third-party sellers then purchase fulfillment and advertising services, increasing revenue per transaction and reinforcing the platform. High recurring operating income from AWS allows Amazon to reinvest heavily in pricing, logistics, devices, and new technologies. Competitors dependent solely on retail margins cannot match this level of investment, effectively turning cloud profits into a structural advantage for commerce dominance. The company also connects Prime, Alexa devices, digital content libraries, and payment systems into a unified ecosystem that raises switching costs. Leaving the platform means giving up convenience, subscriptions, purchase history, and personalized experiences. Finally, Amazon benefits from vast amounts of transactional and operational data. The company applies artificial intelligence to pricing, recommendations, advertising targeting, and supply chain optimization, improving both efficiency and customer experience and reinforcing usage over time.

Management

Andy Jassy serves as the CEO of Amazon, a role he assumed in July 2021 after succeeding the company’s founder Jeff Bezos. He joined Amazon in 1997 and has been deeply involved in shaping the company’s technological and operational direction since its early years. Most notably, Andy Jassy founded Amazon Web Services in 2006 and led the division for fifteen years. Under his leadership, AWS grew into the world’s largest cloud computing platform and became the primary driver of Amazon’s operating income, fundamentally transforming the company from a retailer into a global technology infrastructure provider. Before the creation of AWS, Andy Jassy worked as a technical assistant to Jeff Bezos, a role that placed him close to major strategic decisions during Amazon’s formative period. This experience provided him with a detailed understanding of Amazon’s culture of customer obsession, experimentation, and long term thinking, principles that continue to guide his leadership today. His appointment as CEO was therefore viewed internally as a continuation of Amazon’s operating philosophy rather than a shift in direction. Andy Jassy holds a Bachelor of Arts degree from Harvard University and an MBA from Harvard Business School. Growing up, he was a competitive tennis player, an experience he has credited with shaping his leadership philosophy around preparation, accountability, and performance under pressure. He has emphasized decisiveness and urgency in execution, encouraging teams to act quickly and resolve customer issues efficiently. As a leader, Andy Jassy is known for combining high expectations with operational discipline and clear communication. He has repeatedly highlighted the importance of long term thinking and compounding improvements, noting in his first shareholder letter that Amazon remains in the early stages of its development despite its scale. His tenure as CEO has also included efforts to improve cost efficiency across the retail network while continuing to prioritize innovation in artificial intelligence, logistics, and cloud computing. Given his track record building and scaling AWS and his deep familiarity with Amazon’s culture and operating model, Andy Jassy appears well positioned to guide the company through its next phase, where profitability, efficiency, and technological infrastructure are increasingly central to Amazon’s long term strategy.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. The changes in ROIC mostly come from timing. Amazon usually builds things long before they are fully used. When the company invests in warehouses, delivery networks, or data centers, the costs appear immediately, but the benefits only show up later as more customers use them. That temporarily makes returns look low even if the investment later turns out to be very valuable. The decline around 2017 happened because Amazon was expanding fast shipping. The company built many warehouses and delivery capabilities ahead of demand. At first they were not fully used, which pulled returns down. As order volumes grew and those facilities filled up, returns improved again. The large drop in 2021 and 2022 was mainly caused by the pandemic period. Amazon expanded its logistics network to handle extremely high demand. When shopping patterns normalized afterward, the network was temporarily too large. At the same time cloud customers slowed spending for a while, while Amazon still had to account for the cost of the infrastructure it had already built. Once usage caught up and efficiency improved, returns quickly recovered. The recent improvement comes from a more efficient retail network, strong growth in advertising, and renewed demand for cloud services. These parts of the business grow without needing as much new infrastructure, which helps returns. Looking forward, Amazon plans another major investment phase, mostly in cloud computing and artificial intelligence. This will probably push returns down for a period because building data centers and specialized chips is expensive at first. However, the company says new capacity is being used almost immediately and customers are already committing to it. In the past, the same pattern happened in the cloud business where returns looked weak during expansion but improved once usage increased. Over time, several things support higher returns. Advertising and third party sellers keep growing and require little additional infrastructure. Custom chips and better technology improve efficiency. Artificial intelligence services also tend to run continuously once customers adopt them. In addition, Amazon has already built most of its retail delivery network, so future growth should need less heavy construction than before. Because of this, Amazon’s returns will likely move up and down depending on when it is building new infrastructure. Lower returns during expansion periods are normal, and historically they have risen again after customers begin fully using what the company has built.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Amazon’s equity has grown rapidly mainly because the company keeps most of its earnings inside the business instead of paying them out. Unlike many mature companies, Amazon does not pay a dividend and has historically done very little in share buybacks. That means profits accumulate on the balance sheet year after year and automatically increase equity. The steady increases from 2016 to 2021 reflect a period where earnings expanded and the company reinvested heavily in fulfillment centers, logistics, AWS infrastructure, and new services. Even though Amazon spent aggressively, the business still generated enough profit to grow its equity every year. The exception in 2022 happened because profitability temporarily dropped. The company had excess logistics capacity after the pandemic boom, higher costs, and slower cloud growth, which significantly reduced earnings. Since equity growth largely depends on retained profits, weaker earnings meant equity barely grew that year. The sharp increases after 2022 show the opposite effect. As efficiency improved and AWS and advertising became more profitable, Amazon generated large profits again. Because the company still reinvests most of its cash instead of distributing it, those profits flowed directly into equity. This pattern is generally expected to continue. Amazon’s strategy relies on reinvesting earnings into infrastructure, technology, and new services rather than paying cash to shareholders. As long as the company keeps prioritizing expansion and high-return projects such as cloud computing and artificial intelligence, equity will likely keep rising over time. The growth may fluctuate during weaker profit years, but structurally the business is designed to build equity rather than distribute it.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Free cash flow at Amazon has been volatile because the company intentionally spends very large amounts of cash before the revenue from those investments fully appears. The business is built around expanding infrastructure ahead of demand, which means cash outflows often come first while cash inflows arrive later. As a result, free cash flow says more about where Amazon is in an investment cycle than about the underlying strength of the business. The negative free cash flow in 2021 and 2022 came from the pandemic expansion. Demand surged and Amazon rapidly doubled its fulfillment and logistics network in a very short period. Warehouses, delivery capacity, equipment, and hiring required enormous upfront cash spending. When demand normalized afterward, the company had temporarily built too much capacity and was still paying for it, which pushed free cash flow below zero even though the investments were long term in nature. After utilization improved and efficiency measures were implemented, free cash flow turned strongly positive again in 2023 and 2024. This recovery was driven by higher profits in AWS and advertising combined with a more optimized retail network. Once the infrastructure was already built, the business could generate cash without needing the same level of spending. The large decline in 2025 is mainly explained by a new investment phase rather than weaker operations. Amazon significantly increased capital expenditures, mostly for AWS data centers and artificial intelligence infrastructure. Management stated they expect around $200 billion in investments and that capacity is being installed and used immediately due to strong demand. Building data centers and custom AI hardware requires heavy upfront cash spending, which reduces free cash flow in the short term even if it supports future earnings. The company is also investing in projects such as satellite internet and faster delivery initiatives, further increasing cash outflows. Free cash flow will therefore likely remain cyclical. During heavy buildout periods it can fall sharply or even turn negative, while in periods where infrastructure is already in place it tends to expand significantly. Historically, Amazon has repeatedly shown this pattern, where investment phases depress free cash flow temporarily and later lead to stronger cash generation once usage increases. Over time, several parts of the business should support higher free cash flow. AWS services, advertising, and third party seller services require relatively limited ongoing physical investment once capacity exists. Artificial intelligence workloads also tend to run continuously after adoption, which can improve utilization of data centers. Because much of the retail logistics network is already built, future growth should require less construction than earlier in the company’s history. Amazon mainly uses its free cash flow to reinvest in growth rather than distribute it. Cash is directed toward data centers, logistics infrastructure, technology development, and new services such as artificial intelligence and satellite connectivity. The company’s strategy has consistently been to sacrifice short term cash generation in order to expand long term earning power, which explains why free cash flow can fluctuate significantly from year to year while the overall business continues to grow. The free cash flow yield suggests the shares currently trade at a premium valuation. However, because Amazon is in a heavy investment phase with record capital expenditures, free cash flow yield is not very informative for valuation at this time. We will revisit valuation later in the analysis.

Debt

Another important aspect to examine is the level of debt, specifically whether the business carries a manageable debt load that could be repaid within three years. I assess this by dividing total long term debt by earnings. Based on this calculation, Amazon has debt equal to 0,96 years of earnings. Given this, I do not view debt as a concern when considering an investment in Amazon. The company has not exceeded three years of earnings in debt since 2017, and there are no signs that debt will become a material issue going forward.

Unlock Exclusive Seeking Alpha Discounts – Level Up Your Investing With Zero Risk

If you’ve been thinking about improving your investing process, this is the easiest way to start. These offers are only available through my links, and the Premium plan even comes with a 100% risk-free 7-day trial. Try everything for a week, and if it’s not for you, just cancel. You lose nothing.

1) Seeking Alpha Premium — Try It Free for 7 Days

Access the tools I personally use every day:

• Earnings transcripts

• Stock screeners

• Deep-dive analysis

• Portfolio tracking

• Market news with context that actually matters

Special Price: $269/year (normally $299) + 7-day free trial (for new users only)

Try Premium Free for 7 Days → HERE

(Explore everything — cancel anytime during the trial and pay $0.)

2) Alpha Picks — Proven Stock Ideas

This stock-picking service has delivered +287% returns vs. the S&P 500’s +77% (July 2022–Nov 2025).Great for investors who want curated, long-term picks backed by data.

Special Price: $449/year (normally $499)

Get Alpha Picks → HERE

(Although Alpha Picks doesn’t offer a free trial, its historical outperformance means the subscription can often pay for itself quickly if results persist. For many investors, the potential return far outweighs the upfront cost).

3) Premium + Alpha Picks Bundle — Best Value

Get both services together and save $159.Perfect if you want both broad tools and high-conviction stock ideas.

Special Price: $639/year (normally $798)

Get the Bundle → HERE

(This bundle doesn’t include a free trial, but it gives you both services at a $159 discount. You get Premium’s in-depth research plus Alpha Picks’ high-performing recommendations, making it the most comprehensive option for serious investors.)

Risks

Competition is a risk for Amazon because the company operates across many industries at the same time, each with strong and specialized rivals. Instead of competing in a single market, Amazon faces pressure in retail, cloud computing, advertising, logistics, devices, media, and emerging areas such as healthcare and satellite internet. This means the company must defend multiple leadership positions simultaneously, and strength in one segment does not prevent weakness in another. In retail, Amazon competes with both traditional retailers and digital-first platforms. Large omnichannel retailers such as Walmart combine physical stores with online fulfillment, allowing customers to pick up products locally and reducing delivery time and cost. At the same time, many brands increasingly sell directly to consumers through their own websites or through platforms like Shopify, bypassing Amazon’s marketplace fees and limiting Amazon’s role as an intermediary. Because retail competition is largely based on price, selection, and delivery speed, competitors can pressure margins by subsidizing shipping, offering exclusive products, or using stores as fulfillment hubs. In cloud computing, Amazon Web Services faces growing competition from large technology companies investing heavily in artificial intelligence and enterprise software ecosystems. Microsoft and Google are integrating cloud infrastructure with productivity software and AI tools, which can encourage companies to standardize around a single vendor. Some organizations also adopt multi-cloud strategies to avoid dependence on one provider, reducing switching costs and limiting Amazon’s long term pricing power. Since AWS generates a large share of Amazon’s operating income, increased competition here could have an outsized financial impact. In digital advertising, Amazon competes with dominant platforms that control user attention rather than purchase intent. Companies such as Google and Meta have extensive advertising relationships and user data across the broader internet, while retailers and social media platforms increasingly add their own retail media networks. As more companies monetize their own traffic, advertising budgets may fragment, limiting Amazon’s growth in one of its highest margin businesses. Technology itself also lowers barriers to entry. The internet and artificial intelligence make it easier for smaller businesses to launch online stores, compare prices instantly, and reach customers through social platforms. New business models such as social commerce, influencer storefronts, and direct brand communities allow sellers to avoid marketplaces entirely. This reduces dependence on Amazon and weakens one of its historical advantages, which was being the primary destination for online product discovery.

Macroeconomic factors are a risk for Amazon because the company is deeply tied to overall economic activity across both consumers and businesses. When the economy changes, Amazon does not just feel it in one segment but across retail demand, cloud usage, advertising budgets, and operating costs at the same time. A key risk is inflation. Higher fuel prices, electricity costs, packaging materials, and wages directly increase the cost of running warehouses, transportation networks, and data centers. Amazon’s retail business operates on relatively thin margins, so rising costs can quickly reduce profitability. The company can attempt to raise prices or shipping fees, but doing so risks weakening demand in a highly price sensitive market where customers can easily compare alternatives. This forces Amazon to often absorb part of the cost pressure, which compresses margins. Economic slowdowns also affect consumer behavior. During weaker economic periods, households typically reduce discretionary purchases such as electronics, apparel, and home goods, categories that make up a meaningful portion of Amazon’s sales. Customers may also trade down to cheaper products, buy less frequently, or delay purchases altogether. Even subscription services like Prime can grow more slowly if consumers cut non essential spending. Because retail still represents a large share of revenue, weaker consumer demand can quickly reduce growth. Business spending follows a similar pattern. During uncertain economic conditions companies try to control costs, which affects Amazon Web Services. Businesses may delay cloud migrations, optimize usage, or reduce computing workloads to lower expenses. AWS remains structurally important, but short term growth can slow when corporate budgets tighten. Since AWS contributes a large share of operating income, even modest changes in demand can materially affect overall profitability. Advertising is also cyclical. Marketing budgets are often among the first expenses companies reduce in downturns. That can slow Amazon’s advertising growth despite stable traffic, reducing one of its highest margin revenue streams. Macroeconomic conditions additionally influence inventory and operations. Rapid changes in demand can leave Amazon either understocked or overstocked. If demand weakens unexpectedly, the company may have to discount products or write off inventory. If demand spikes, Amazon must spend heavily on shipping and staffing to maintain delivery speed. Seasonal peaks such as the holiday period amplify these effects, making operational planning more difficult.

Regulation is a risk for Amazon because the company operates in many industries that governments increasingly want to control, and changes in rules can directly affect how its business model works rather than only adding small compliance costs. A major area of concern is antitrust enforcement. Authorities in the United States, Europe, and other regions are examining whether Amazon’s marketplace gives it an unfair advantage over third party sellers. Regulators question the use of seller data, product rankings, and the integration of fulfillment and advertising services. If rules restrict how Amazon promotes its own products, bundles services, or ranks search results, the marketplace could become less profitable and less differentiated. In extreme scenarios regulators could even force structural separation between business units, which would weaken the ecosystem that ties retail, logistics, advertising, and Prime together. Legal liability is also evolving. Courts are increasingly questioning whether Amazon is merely a neutral platform or partly responsible for products sold by third party sellers. If the company becomes legally liable for harmful or defective goods sold on its marketplace, it would need stricter vetting, monitoring, insurance, and compliance procedures. That would increase operating costs and reduce the economics of third party sales, which today represent a large portion of retail profits. Consumer protection rules are another risk. Governments have challenged subscription practices, product recommendations, and interface design. Fines or forced changes to how Prime subscriptions, advertising disclosures, or purchase flows work could reduce conversion rates or weaken customer retention. Because Amazon relies heavily on seamless user experience, even small required design changes could affect purchasing behavior at scale. Data and privacy regulation is expanding globally. Amazon collects large amounts of data across shopping, devices, advertising, and cloud services. New rules around data usage, storage location, and sharing could limit personalization, advertising targeting, and recommendation quality. Compliance may also require expensive infrastructure changes and restrict how different parts of the company share information internally. Cloud computing regulation presents another dimension. Governments increasingly treat cloud infrastructure as critical national infrastructure. This can lead to data localization requirements, government access rules, or restrictions on cross border data transfers. Such policies may force Amazon to build duplicate infrastructure in multiple regions, raising costs and reducing efficiency advantages in AWS. Labor and logistics regulation also matter. Rules about warehouse working conditions, delivery driver classification, environmental standards, and emissions can increase operating expenses. Since fast delivery is central to Amazon’s value proposition, higher labor or transportation requirements could weaken one of its core advantages.

Reasons to invest

E-commerce is a reason to invest in Amazon because the company continues to strengthen the core drivers of online retail demand while structurally improving how it makes money from each transaction. Amazon’s retail model is built around selection, price, and convenience, and each of these factors is still expanding rather than maturing. The platform keeps adding brands across both premium and low price categories, ranging from luxury labels to millions of low cost everyday items. A very broad assortment attracts customers initially, but over time it changes behavior. When customers learn they can reliably find almost anything in one place, they default to starting their shopping on Amazon rather than searching elsewhere. The shift toward everyday essentials and groceries further strengthens this behavior. When customers order frequently purchased items such as household goods or food, they visit the platform more often. Management has noted that customers who use same day grocery delivery shop more than twice as often. This turns Amazon from an occasional shopping destination into a habitual one, which increases long term customer value and makes demand more predictable. Prime membership reinforces this dynamic. The service bundles shipping, entertainment, discounts, and digital benefits into one subscription. Instead of competing for each individual purchase, Amazon competes to become the default shopping environment. Once customers are inside the ecosystem, they tend to consolidate spending there because the perceived cost of shipping is already paid and the experience is familiar. A major structural improvement is the growing role of third party sellers. Most physical units sold on Amazon now come from independent merchants rather than Amazon itself. This reduces inventory risk while allowing Amazon to earn fees from fulfillment, storage, payments, and advertising. In practice, the traditional retail business increasingly drives traffic while the marketplace services generate the majority of profit. As seller participation grows, Amazon earns more from the platform without needing to own the products being sold. The logistics network is another long term advantage. Amazon has built a delivery system comparable in scale to national carriers and has reorganized it into regional networks that place products closer to customers. This enables faster delivery while lowering transportation distance. Faster delivery increases purchase frequency, especially for low cost items, and strengthens the habit of using Amazon for routine purchases. Same day and even sub hour delivery expands the range of products consumers are willing to buy online, including groceries and urgent items that were historically store based. Efficiency improvements also support the investment case. Robotics and automation continue to increase productivity inside warehouses while reducing cost per package. The company has improved delivery speed while simultaneously lowering the cost to serve, which is unusual in retail and suggests operating leverage as volume grows.

Amazon Web Services (AWS) is a reason to invest in Amazon because it is the company’s most profitable business, it is still growing quickly at very large scale, and it sits at the center of two long term shifts that are still early: moving computing from company owned servers to the cloud, and rebuilding software and customer experiences around artificial intelligence. AWS is the core infrastructure layer behind a huge part of the modern economy. Companies use it for basic needs like computing power, storage, databases, and security, and once those workloads are running reliably in AWS, customers typically do not move them around often. This creates sticky relationships and recurring revenue that is more stable than retail demand. Management continues to say AWS wins many of the large enterprise and government cloud transitions, which matters because these contracts are long term and usually expand over time as customers add more services. AWS also benefits from being a very broad platform. Customers can start with something simple such as storage or virtual servers and then add databases, analytics, security tools, and AI services as their needs grow. That breadth increases the value of staying inside one ecosystem and makes AWS hard to replace with a single competitor. Artificial intelligence is a major growth driver. Amazon argues that most future AI usage will be inference, meaning running AI systems continuously inside real products and workflows rather than only training models in a lab. When companies deploy AI broadly, they need reliable cloud infrastructure, and they often prefer to run AI in the same place where their applications and data already live. This naturally favors the large cloud providers, and AWS is positioned to capture that demand. AWS is not only selling access to AI models, it is trying to lower the cost of using AI at scale. A big part of that strategy is custom chips such as Graviton for general computing and Trainium for AI workloads. Amazon says Trainium based offerings can deliver materially better price performance than comparable GPU based instances, which is attractive because AI can be expensive to run. AWS also reports that its custom chip business is already meaningful in size and growing quickly, showing that customers are adopting these alternatives. On the software side, AWS is building tools that make it easier for companies to adopt AI without starting from scratch. Services like Bedrock and SageMaker are designed to help customers choose from multiple models, customize them for their own needs, and deploy them securely. In the most recent earnings call coverage, Amazon described Bedrock as already operating at a multibillion dollar annualized run rate and highlighted strong usage growth, which supports the idea that AI is becoming a meaningful part of AWS rather than only a future promise.

Advertising is a reason to invest in Amazon because it has become one of the company’s fastest growing and most profitable businesses, and its economics improve as the rest of Amazon grows. Unlike retail, advertising does not require warehouses, inventory, or shipping. Most additional revenue therefore turns into profit, which means growth in advertising can meaningfully increase overall earnings even if retail margins remain thin. Amazon’s main advantage is where its ads appear. Many online ads are shown while users are browsing content, watching videos, or socializing. On Amazon, ads are shown when customers are actively searching for a product they intend to buy. This “purchase intent” makes the ads more valuable to brands because they influence a decision that is about to happen rather than trying to create interest from scratch. As a result, advertisers often see stronger returns and are willing to spend more on the platform. The company also benefits from first party data. Because customers search, compare, and buy products directly on Amazon, the company knows what people actually purchase, not just what they click or view. This allows very precise targeting and measurement of results. As privacy rules limit tracking across the broader internet, advertising based on direct shopping behavior becomes more attractive, which strengthens Amazon’s competitive position. Advertising is tightly connected to the marketplace. Third party sellers use ads to stand out among millions of listings, and as more sellers join the platform the demand for advertising naturally rises. This creates a reinforcing cycle: more selection attracts more customers, more customers attract more sellers, and more sellers increase advertising spending. Amazon therefore grows advertising revenue without needing to acquire users in the same way a pure advertising platform would. Amazon is also expanding beyond search ads into a broader advertising network. Prime Video now includes an ad supported tier with hundreds of millions of viewers, giving brands reach outside the shopping experience. Live sports and streaming content allow advertisers to build awareness, while sponsored listings capture the final purchase decision. This combination lets Amazon offer both brand advertising and direct response advertising inside one ecosystem.

Support the Blog

I want to keep the blog free and accessible for everyone. If you enjoy the content and would like to support it, you can buy me a cup of coffee through PayPal. Every little bit helps and is truly appreciated!

Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 7,17, which is from the year 2025. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 19,4% over the next five years, but 15% is the highest number I use. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Amazon's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $215,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Amazon at a price of $107,55 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 139.500, and capital expenditures were 131.900. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 92.330 in our calculations. The tax provision was 19.087. We have 10.690 outstanding shares. Hence, the calculation will be as follows: (139.500 – 92.330 + 19.087) / 10.690 x 10 = $61,98 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Amazon's free cash flow per share at $0,72 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $11,37.

Conclusion

I find Amazon to be an intriguing company, and I have great confidence in its management. Amazon has built its moat through a system of reinforcing advantages that combine brand trust, ecosystem lock in, logistics scale, network effects, data advantages, and the ability to fund continuous reinvestment through high margin cloud computing. ROIC has been volatile over the past decade because the company periodically goes through heavy investment cycles, but outside these periods returns have been strong. Free cash flow follows a similar pattern, being pressured during expansion phases yet substantial once investment levels normalize. Competition is a risk because Amazon operates across multiple industries with strong specialized rivals, so pressure in any one segment can affect overall profitability as competitors limit pricing power and attract customers or sellers elsewhere. Macroeconomic factors are also a risk since inflation raises operating costs while economic slowdowns reduce consumer spending, cloud usage, and advertising budgets at the same time. Regulation adds further uncertainty because new rules around antitrust, liability, data privacy, and labor could force operational changes, increase expenses, or weaken the integration between its business segments. E commerce remains a reason to invest as Amazon continues to strengthen selection, price, and convenience while making shopping habitual through Prime, fast delivery, and everyday essentials, and the expanding third party marketplace allows the company to earn more from each transaction with less inventory risk. Amazon Web Services is another reason to invest because it is the most profitable segment, generates recurring revenue, and benefits from long term growth in cloud computing and artificial intelligence adoption. Advertising further supports the case as a fast growing high margin business that monetizes purchase intent using first party data and scales with platform traffic. Overall, I believe Amazon is a high quality company and, given the elevated capital expenditures, the Ten Cap or Payback Time methods are less useful, so buying shares around $172, implying roughly a 20% discount to intrinsic value based on the Margin of Safety price, appears to be an attractive long term investment.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.

I hope you enjoyed my analysis! While I can’t post about every company I analyze, you can stay updated on my trades by following me on Twitter. I share real-time updates whenever I buy or sell, so if you’re making your own investment decisions, be sure to follow along!

Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give. If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to ADEPAC. It is a charity I know first hand and I know they do a great job and have very little money. If you have a few Euros to spare, please donate here by clicking on the PayPal icon. Even one or two Euros will make a difference. Thank you.