Amazon's Secret Weapon Is Getting Stronger
Key Points
AWS delivered its best quarter in a long time.
Amazon's custom chips are growing incredibly popular.
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Quick, what's the first thing you think of when you hear Amazon (NASDAQ: AMZN)? The vast majority of respondents would likely mention the e-commerce platform. However, while the platform is the most consumer-facing part of Amazon's business, it's far from the most exciting.
Instead, Amazon's cloud computing and chip business is by far the best reason to invest in the stock.
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Although there were some questions surrounding whether Amazon would be able to compete with more AI-focused peers, Amazon's growth is starting to accelerate, and it could be one of the best stocks to own in 2026.
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AWS delivered the best quarter in three years
To me, Amazon Web Services (AWS) is the top reason to invest in Amazon stock. AWS is Amazon's cloud computing platform, and is the largest cloud computing player in the world. At the start of the AI build-out, AWS didn't fare as well as its competitors, like Google Cloud and Azure. However, it's starting to gain momentum.
AWS revenue rose 24% year over year in the fourth quarter -- the best growth in 13 quarters. So, not only is AWS excelling, it's getting stronger. One of AWS' secret weapons is the chips that it has designed in-house. While Amazon didn't elaborate on the exact growth rate, the cloud computing business using its chips rose in the triple-digit range during Q4.
Clearly, customers like what they're getting from Amazon's in-house chips, and these could serve as a cheaper alternative to running workloads on more expensive hardware from Nvidia (NASDAQ: NVDA). If this trend persists throughout 2026, don't be surprised to see Amazon's stock rally.
While Amazon may be known for its commerce services, AWS actually provides most of its profits.
If AWS is successful, Amazon as a whole will be
In Q4, AWS accounted for 17% of total revenue. However, when you shift the focus to operating profits, its share changes. In Q4, AWS generated $12.5 billion in operating income. Companywide, Amazon generated $25 billion. So, despite making up 17% of sales, AWS generated half of its operating profits. Keep in mind, Amazon's holiday quarter is usually its commerce division's most profitable quarter, so this metric is usually more skewed toward AWS throughout the year. In Q3, AWS made up 66% of operating profits.
The reality is, AWS is the driver behind Amazon's stock. With AWS growing faster than its commerce segment, Amazon will continue to deliver stellar companywide results. I think it's clear that AWS is set up to thrive in today's AI-first environment, making the stock a great buy after its post-earnings sell-off.
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Keithen Drury has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
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