Amazon's Stock Approaches a Critical Juncture: Can AWS and Advertising Overcome Resistance, and Will

Amazon is about to release its Q3 earnings, and this report may become a key determinant for the direction of its stock price.

Investors are facing two possibilities: if the data is positive, Amazon’s stock price may break through the long-standing resistance range and achieve a strong rise. However, if it underperforms, it could lead to a pullback, potentially confirming a bearish “double top” pattern. Can AWS and the advertising segment continue to drive company growth? Will profitability and cash flow remain robust? These questions directly impact Amazon’s long-term investment value.

Below, we provide an in-depth analysis of Amazon’s core business performance, financial condition, and the potential impact of the Kuiper project, to help readers better understand the investment opportunities at this critical juncture. You might wonder, is now the right time to increase holdings in Amazon stock? The answer is provided for you at the conclusion.

AWS and Advertising: Amazon’s “Rocket Engines” for Growth

AWS and advertising are two key engines driving Amazon’s revenue and profit growth. AWS, as Amazon’s cloud computing division, has been one of the most important profit sources for the company in recent years, with its growth rate rebounding to 19% last quarter. AWS not only provides robust cloud computing services to enterprise clients but has also made significant advances in AI applications and data analytics, further consolidating its leadership in the global cloud services market.

As of Q3 2024, AWS’s annualized revenue run rate (ARR) exceeded $105 billion, demonstrating its immense scale and growth potential. According to Amazon’s management, with clients completing their cost-optimization cycles, demand for AWS is recovering, especially in next-generation AI solutions, where demand for cloud computing capacity is surging. AWS’s strong growth has seen its contribution to the company’s operating income rise to 63.2% this quarter, compared to 54% in the previous year, underscoring that AWS is not just a revenue source but a core driver of Amazon’s profit growth.

The advertising business, meanwhile, serves as another key growth driver for Amazon. Despite Amazon’s reputation for its e-commerce operations, advertising revenue has shown an outstanding performance in recent quarters, with a 20% year-over-year increase in the last quarter, reaching an annual revenue scale of $51 billion. This high-margin business’s ongoing expansion has helped the company further optimize its revenue structure and provided stable cash flow support. Particularly in the context of weaker consumer demand for goods, advertising has become an important pillar for Amazon to maintain profitability.

The advantage of Amazon’s advertising business lies in the unique nature of its ecosystem. Amazon can integrate advertising with its vast e-commerce user data, providing advertisers with more precise targeting services. This not only sustains high growth rates in the advertising business but also allows Amazon to compete with giants like Google and Facebook in the digital advertising market.

The synergy between AWS and the advertising segment enables Amazon to maintain strong profitability and stable growth even amid economic uncertainties. The continued expansion of AWS and rapid growth in advertising not only boost the company’s overall profit margins but also equip Amazon with greater resilience in the market. These figures highlight Amazon’s diversified business advantages and demonstrate how its core businesses are continually growing and creating greater value for the company.

Cash Flow and Financial Performance: A Strong "Financial Moat"

In Q2 2024, Amazon’s operating cash flow hit a record high of $108 billion, up 53% year-over-year. Such a level of cash flow allows Amazon to maintain strong financial flexibility, be it investing in emerging businesses, expanding existing operations, or managing potential economic uncertainties.

For investors, cash flow performance is a critical indicator of a company’s health, as it reflects the ability to withstand market volatility and supports long-term growth. The growth in cash flow mainly benefits from the expansion of AWS and advertising, both of which have not only shown rapid growth but also boast high profit margins, ensuring sufficient cash inflow even as the business scales.

AWS, as Amazon’s cloud computing arm, remains a primary cash flow source for the company. In Q2 2024, AWS revenue grew by 26% year-over-year, reaching $24.3 billion. This growth has significantly driven Amazon’s overall cash flow. Compared to traditional retail operations, AWS’s higher profit margins mean more revenue directly contributes to cash flow. AWS’s offerings include basic computing, storage, and database services, as well as advanced enterprise solutions like AI, machine learning platforms, and large-scale data analytics—all of which improve the quality of revenue and strengthen cash flow stability.

AWS clients’ long-term contracts have also ensured continuous cash inflows, effectively reducing Amazon’s reliance on short-term market fluctuations and enhancing financial predictability. Management noted that as companies complete cost-optimization cycles, AWS has received numerous high-margin orders in areas like data analytics and AI, which will continue to provide stable cash flow for the company in the coming quarters.

This robust cash flow performance has enabled Amazon to continue making substantial capital expenditures, including data center expansions and network infrastructure upgrades, thereby further consolidating AWS’s market position. These investments are expected to yield more returns in the future, helping Amazon retain its leadership in the cloud computing space. For investors, this positive cycle not only enhances the company’s financial resilience but also suggests greater potential for long-term stock price growth.

In terms of profitability, Amazon has exceeded market expectations for two consecutive quarters. Despite some macroeconomic pressure on its e-commerce business, the strong performance of AWS and advertising has allowed the company to continue improving its overall profit margins.

The high margins from AWS and ongoing expansion of advertising have enabled Amazon to sustain business growth while continuously enhancing overall profitability. In terms of its financial structure, Amazon has been constantly optimizing its income sources to ensure a solid financial foundation by allocating more resources to high-margin, high-growth potential businesses, effectively strengthening its “financial moat.”

This strategy, centered around strong cash flow and optimized financial structuring, has allowed Amazon to maintain a high degree of flexibility and growth potential even amid market uncertainties.

Kuiper Project: Ambition to Explore Space, or a Test for Profitability?

The Kuiper project is Amazon’s satellite broadband initiative, aiming to provide high-speed internet services globally by launching over 3,000 satellites. This project is seen as a strategic move to expand Amazon’s business boundaries, but it has also raised concerns in the market regarding the company’s profit margins. Although the Kuiper project could create new revenue streams for Amazon, the significant upfront investment has caused some investors to worry about its short-term financial impact.

Moreover, Amazon faces competition from SpaceX’s Starlink project, which has already achieved commercialization in several locations, with approximately 7,000 satellites in orbit, leading the satellite broadband market. In contrast, Kuiper is only in its initial launch stages and still has a way to go before generating sizable revenue. Nevertheless, Amazon’s advantage lies in its extensive technological resources and substantial financial backing, which could support the long-term development of the project.

Investors are primarily concerned that Kuiper’s costs might pressure the company’s existing profit margins. The project is estimated to cost between $15 billion to $20 billion, covering R&D, satellite launches, and infrastructure development. However, according to analysts, the majority of Kuiper’s spending will be treated as capital expenditure rather than operational costs, suggesting that the immediate impact on profits might not be as significant as feared. Furthermore, the company stated that these investments are part of a long-term strategy, expected to gradually convert into revenue over the coming years.

While investors are concerned about Kuiper’s substantial spending and its effect on short-term profitability, this project also holds significant future opportunities. As analysts have pointed out, while concerns about Kuiper may be overblown, they highlight investor focus on Amazon’s profit margins. For a company with a dominant position in e-commerce, logistics, advertising, AI, and cloud computing, even the most pessimistic outlook would find it difficult to deny Amazon’s long-term growth potential. Thus, investors’ main concern revolves around profitability and cash flow.

Indeed, during periods of expanding margins, Amazon’s stock has performed exceptionally well, as each 1% improvement in operating margin roughly equates to a 15% increase in revenue.

The satellite broadband market holds tremendous potential, particularly in underdeveloped and remote regions where demand for broadband remains unmet. Amazon plans to attract more users by bundling Kuiper services with Prime membership offerings, creating competitive packages. If Kuiper can carve out a position in this competitive market, the resulting incremental revenue would be highly attractive, helping boost Amazon’s overall valuation.

Valuation and Investment Opportunities: Reasonable Valuation for Long-Term Growth

Stepping back, Amazon’s earnings compound annual growth rate (CAGR) over the next decade is expected to be around 20%, plus approximately 10% CAGR in revenue. The core businesses—retail, logistics, AWS, and advertising—are all resilient, operating in rapidly growing markets, and consistently gaining market share. Over the long term, there are very few companies better positioned than Amazon to achieve this level of growth.

Currently, Amazon’s price-to-earnings (P/E) ratio stands at 32, equivalent to a PEG ratio (P/E to growth rate) of 1.3, which is lower than Alphabet (GOOG) and Meta (META), companies often considered among the most affordable big tech stocks, both with PEG ratios of around 1.5. Additionally, Amazon’s valuation is far cheaper compared to its peers like Apple (AAPL), Microsoft (MSFT), Walmart (WMT), and Costco (COST).

While I believe Amazon’s PEG ratio could eventually reach 2, aligning with many high-quality stocks, a conservative estimate assumes a PEG of 1.5, comparable to Alphabet and Meta. This implies that by 2026, Amazon’s P/E ratio could reach 36. Applying this multiple to the 2026 earnings estimates, we can set a price target of $260 per share by the end of 2025. For investors who want to seize this growth opportunity before the upcoming earnings release, the multi-asset wallet BiyaPay is an ideal option.

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There are many ways to value a stock, but if we look at earnings, cash flow, and sales, Amazon has historically been undervalued by these metrics. Let’s break down these indicators one by one.

Amazon has never been known for its high earnings per share (EPS), but that is starting to change, with the company setting a new record over the past 12 months:

Its P/E ratio is now close to its historical low.

Should Q3 performance exceed Wall Street’s expectations, the forward P/E could fall to around 40.

In terms of cash flow valuation, Amazon remains historically low.

This is a particularly convincing metric, especially if Amazon posts strong Q3 results and sets another operating cash flow record during the crucial holiday season in Q4, further proving its valuation attractiveness.

Lastly, Amazon’s price-to-sales ratio is slightly above 3, aligning with its 5-year and 10-year averages. However, today’s sales are more valuable than in the past, as they generate more cash flow and earnings, making the current valuation reasonable.

Is Amazon a Buy, Hold, or Sell?

To summarize, Amazon’s investment opportunity is supported by three key drivers: the growth of AWS and the advertising business, solid financial performance, and the potential of the Kuiper project. AWS and advertising are the company’s core engines of growth, providing solid support for revenue and cash flow expansion. Meanwhile, Amazon’s resilience in its core business areas equips it well to navigate market challenges.

The Kuiper project, as an emerging business for Amazon, is still in its early stages but demonstrates the company’s ambition in technology and market expansion. If this project succeeds, it could open up new revenue streams and further solidify Amazon’s leadership in the tech space.

Investment Recommendation

Considering Amazon’s ongoing growth potential in earnings and cash flow, as well as its leadership across multiple high-growth fields, we believe that Amazon remains an attractive investment for long-term investors. The current valuation level is appealing compared to its peers, and future growth expectations are stable. Therefore, investors might consider holding or gradually adding to their positions at the current price level to seek long-term returns.

Risks to Be Aware Of

Despite Amazon’s strong performance in various areas, investors should be mindful of uncertainties posed by the macroeconomic environment, especially the potential impact of a global economic slowdown on its core e-commerce business. Additionally, high capital expenditures for new ventures like the Kuiper project could pressure profit margins in the short term. Thus, it is advisable for investors to keep an eye on the overall market conditions and Amazon’s financial health when making investment decisions.