Amazon: Why It’s on My 2025 Watchlist
$AMZN
Amazon (AMZN) Disclosure – 4.38% of my portfolio, +150% total gain.
Personally, I don’t think I can own enough Amazon shares. This is by far one of my favorite businesses of all time. I’m adding AMZN to my 2025 watchlist because I just naturally gravitate toward this company each year.
When I originally took a position in AMZN, my thesis was simple, but I had more than one reason:
Amazon digitized brick-and-mortar shopping better than anyone else. Their scaling in e-commerce seemed indefinite—I couldn’t see the endgame. There was a moat and a first-mover advantage. This is the type of buy-and-hold compounder I wanted in my portfolio.
A hedge against outdated business models. I have some background in the grocery-store/brick-and-mortar space, and I felt Amazon was a hedge against this type of outdated business model, which carries plenty of risks and operates on very low margins. This is like the “hedge against your livelihood” theory I’ve discussed in previous posts. The independent grocery store chain owner, frightened by Amazon disrupting everything around him, invested in Amazon shares.
The “Ecosystem Effect.” This is a term I made up. It refers to when a company’s business is so influential that people make a living just by operating within its ecosystem. Amazon doesn’t even know you or your business, yet you make a living and depend on Amazon. The ecosystem effect is everywhere within Amazon—affiliate marketers, third-party sellers, logistics partners, etc. There are industries within industries inside Amazon’s ecosystem.
When I look at the business today, some of my reasons for wanting to add on a stock dip have changed. Now, I’m more fired up about:
AWS and its dominance in AI development and apps
Automation and physical robots within Amazon’s ecosystem and distribution centers
Advertising revenue growth
Amazon Prime Video eventually becoming a money-maker following the Netflix model
Amazon Prime’s subscription model
I’ve never met a person who canceled their Amazon Prime subscription—have you? And don’t forget the power of their “Subscribe and Save” option, which keeps customers locked in unlike brick-and-mortar models.
The Retail Business Is Quietly Becoming a Profit Machine
I’ll be the first to admit, Amazon’s retail segment has given me some frustration over the years due to what seemed like a margin drag—kind of like a necessary engine that was only used to fund and support AWS. I think those days are long gone, and the retail business is respected again with investors and at Amazon HQ.
North America Operating Margin: 8%
International Operating Margin: 3% (after turning profitable for the first time in years)
In the world of retail, these margins are great. To put this in perspective:
Operating Margins for Costco, Target, Kroger, and Best Buy range anywhere from 2.5% to 4%.
What’s Driving This Profitability?
Cost-to-Serve Efficiencies: Amazon has reduced per-unit delivery costs for two consecutive years while increasing delivery speed.
Robotics & Automation: Facilities like Shreveport are proving that automation can drive down costs significantly.
Advertising Revenue: More on this later, but it’s essentially “free money” layered on top of existing retail operations.
Prime Logistics: The Hidden Growth Driver
Amazon’s same-day and next-day delivery network has expanded rapidly:
Delivered over 9 billion items the same or next day globally in 2024.
Same-day delivery sites expanded by 60% YoY, now covering 140+ metro areas.
Why Does This Matter?
Faster delivery = higher conversion rates
Higher conversions = more sales per customer
More sales = operating leverage = margin expansion
It’s a self-reinforcing loop. Every time Amazon gets faster, they get more profitable.
Advertising: The High-Margin Business Hiding in Plain Sight
Amazon’s advertising business is quietly becoming a profit machine.
Q4 2024 Ad Revenue: $17.3 billion (+18% YoY)
Annual Run Rate: $69 billion
This Is Important Because:
It’s High-Margin: Unlike retail, advertising has almost zero additional cost once the system is in place.
It’s Growing Fast: Double-digit growth on a massive base.
It’s Built on Existing Traffic: Amazon doesn’t need to “acquire” users for ads—they’re already shopping on the platform.
Think of it like this:
Amazon built the world’s busiest mall (e-commerce), and now they’re renting out billboard space (ads) inside that mall.
AWS: The Cash Cow Powering Everything
Q4 AWS Revenue: $28.8 billion (+19% YoY)
Operating Income: $10.6 billion → 36.8% margin
Why Is AWS So Profitable?
Recurring Revenue: Businesses pay monthly, just like a subscription.
High Margins: Once the infrastructure is built, adding new customers costs almost nothing.
AI Growth: AWS powers many of the world’s AI applications, which require massive computing power.
AWS isn’t just a side hustle—it’s a core profit driver that funds Amazon’s other ventures.
Why Amazon Is Investing in AI (And Why It Matters)
You might wonder, “Why is AWS investing so heavily in AI?”
Simple answer: AI is the next growth engine.
AI Needs Massive Computing Power: AWS sells that power.
AI Tools = Higher Value Services: AWS offers AI services (like SageMaker) that businesses pay extra for.
Custom AI Chips = Higher Margins: By building their own AI chips, AWS reduces costs and increases profits.
The more the world adopts AI, the more they’ll rely on AWS to power it.
Financial Efficiency: Amazon’s Balance Sheet Is Stronger Than Ever
Operating Income (2024): $68.6 billion (+86% YoY)
Free Cash Flow: $38.2 billion
Net Income: $59.2 billion (+95% YoY)
Amazon isn’t just growing—they’re becoming more profitable and efficient.
Margins are expanding
Free cash flow is surging
They’re turning investments into cash faster than ever
Why Amazon Is on My 2025 Watchlist
E-Commerce: More profitable, with operating margins still growing domestically and internationally.
Advertising: A hidden growth engine with pure profit potential.
AWS: Still a cash cow and high margin business with recurring revenue.
AI: The next frontier, with AWS positioned as a key enabler.
Operational Efficiency: Margin expansion through automation, logistics, and cost control.
The market could still be viewing Amazon as a low-margin retailer with a cloud business attached.
Is Amazon Expensive?
On the surface, a forward P/E of 38 might seem high. But when you dig deeper:
Amazon’s earnings growth is accelerating.
High-margin businesses like AWS and advertising are scaling fast.
The company is entering a phase of margin expansion and operating leverage.
Subscription models are valued at a premium by investors, and I think it’s for good reason how powerful this model has become.
Conclusion
I’ll leave you with a visual of the Big Five mega-cap tech stocks since 2020: (META, AAPL, GOOGL, MSFT, AMZN). As you can see, AMZN has delivered the lowest return among them during this period. But rather than seeing this as a disappointment, I view it as a compelling reason to be bullish. Amazon’s underperformance creates a greater runway for potential upside. With its growing profitability, expanding high-margins, and operational efficiency, Amazon has the potential to outpace these stocks in the years ahead.
Thank you for reading and please subscribe for more long-term investing content.
Congratulations to the Philadelphia Eagles! 🏆
If you’ve been reading some of my content, you’ve probably picked up on the fact that I’m a diehard Eagles fan, born and raised in the Philadelphia area. Personally, I’m still in shock.
You might enjoy my post below, where I draw an analogy between how games are won in the trenches and how you can build a stock portfolio with the same mindset. If you build around the line of scrimmage—the Defensive and Offensive Lines—your odds of winning go way up overtime.
Ironically, it could be argued that this very blueprint and culture began with Andy Reid during his time as the Eagles' coach. His influence laid the foundation for what we’re seeing today.
So congratulations to everyone who bleeds green. We can all learn lessons from the greats in sports.
The Offensive Linemen of Your Stock Portfolio
Sorry for the cheesy sports analogy, but I kept thinking about how little attention the Eagles’ and Chiefs’ offensive lines get in the national media. Sure, their hometown fans treat them like A-list celebrities, but outside of that, these guys are the rough, tough, humble heavy-movers doing the dirty work—without much recognition.
References:
https://www.businesswire.com/news/home/20250205727633/en/Amazon.com-Announces-Fourth-Quarter-Results
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. All opinions are my own, and I am not a financial advisor. The information provided reflects my personal views and is intended to encourage discussion and thought among readers. Investments involve risk, including the loss of principal, and past performance is not indicative of future results. Always conduct your own research or consult with a qualified professional before making any financial decisions.