5 Things to Know About Amazon Stock Before You Buy

One of the most prominent companies in the world today is Amazon (NASDAQ: AMZN). But when most people think of the tech giant, they think of its dominant e-commerce platform and the Prime subscription service that supports it.

However, Amazon is a veritable conglomerate, with myriad products and services in both the consumer and enterprise segments. For those who are thinking of buying its shares -- which look attractive, in this investor's opinion -- here are five key things to know.

1. Two core businesses, with a third on the way

It can be easy to get overwhelmed by the breadth of Amazon's empire. Yet there's a good way for novice investors to simplify things: Amazon is essentially two businesses today... with a third on the way.

The two main businesses are e-commerce and Amazon Web Services.

Amazon was obviously the first-mover in building out a nationwide e-commerce logistics and delivery system, and has reinforced its massive lead by outspending would-be competitors and continuing to improve delivery times, variety, and dependability. Amazon's Prime subscription, which provides its loyal customers with free two-day delivery on most items, has been further augmented with perks including a leading video streaming service.

After spending massive sums to build its market share and delivery infrastructure, and booking losses for decades, Amazon is reaping the benefits. While first-party retail is a low-margin business, Amazon now generates increasing profit margins from its e-commerce segment. Profits primarily flow through services for third-party sellers, as well as advertising.

Today, third-party sellers make up 62% of Amazon's paid units, while advertising revenue has grown to more than $60 billion over the past 12 months, putting Amazon firmly in third place in the digital advertising market behind Alphabet and Meta Platforms.

Meanwhile, Amazon took a similar strategy to Amazon Web Services, spending huge amounts of money on fixed infrastructure, from which it's now reaping massive profits. AWS was also a first-mover in its space, and it's still the largest cloud computing platform in the world, with $116 billion in trailing 12-month revenue. Yet the platform is still growing fast at 18%. Notably, AWS is Amazon's largest profit center, with a whopping 36.8% operating margin over the past year.

While e-commerce and AWS are Amazon's two main businesses, Amazon is quite literally launching a third: satellite-based broadband service through what it has dubbed Project Kuiper. Amazon just launched its first commercial satellites in April, and management anticipates opening the service to customers before 2025 is out. Investors can look forward to this new business complementing the other two main pillars.

2. Amazon is about to become the largest revenue generator in the world

One fun fact about Amazon is that while it isn't the largest company in the world in terms of market cap, it's about to become the largest company in terms of revenue, surpassing Walmart (NYSE: WMT).

Amazon actually surpassed Walmart in terms of quarterly revenue in Q4 2024, though it currently still lags Walmart in terms of annualized revenue. Over the 12-month period that ended in June, Amazon generated $670 billion in revenue, while Walmart generated $693 billion. However, with Amazon growing revenue at a 13.3% rate last quarter versus Walmart's 4.8% growth rate, it seems as though Amazon will shortly overtake Walmart for the revenue crown.

Investors may worry that Amazon won't be able to keep growing at a rapid rate, considering how large it already is.

But that fear may be unjustified in the case of Amazon, which more than perhaps any other company in the world is willing to reinvest and innovate new businesses and technologies at the expense of near-term profits. With that innovation engine, I'd expect Amazon to grow at a greater pace than the global economy for a long time to come.

3. Amazon's AI strategy could be a low-key winner

This summer, AI leader OpenAI grabbed numerous headlines with its announcements of massive partnerships for hundreds of billions of dollars in AI investments. But while OpenAI has been sucking a lot of the air out of the room publicity-wise, Amazon's AI investee and key customer Anthropic has been quietly going about its business, and could give OpenAI a run for its money.

Anthropic CEO Dario Amodei just disclosed that his company has grown its annualized revenue run rate from $1 billion to $7 billion over just the past nine months. On the back of that hypergrowth, Anthropic just completed a fundraising round in the private market that valued it at $183 billion, triple its valuation from last year. While the exact size of Amazon's stake in Anthropic has not been made public, analysts estimate Amazon owns about 15% to 19% of it.

Whereas OpenAI is inking giant deals and appears to want to be all things to all people in AI, Anthropic and Amazon are pursuing a more practical strategy. Anthropic, for instance, is concentrating on the application with perhaps the most clear-cut benefit for AI today, and where it can make the most near-term revenue: software coding. Anthropic is currently seen as the dominant large language model provider for software coding, and its skyrocketing financials are a testament to its savvy market targeting.

Meanwhile, Anthropic's latest models are being trained and run not on Nvidia GPUs but rather on the Trainium and Inferentia chips that Amazon designed in-house. Amazon began its chip design services years ago, and its most recent chips are much less expensive to use than Nvidia's. Using Trainium and Inferentia chips gives Anthropic the benefit of lower-cost computing than its rivals, while Amazon brings in more profitable cloud computing revenue that doesn't require it to pay for even more high-margin Nvidia chips.

This pragmatic and vertically integrated AI strategy could be the one that ends up winning out over the more ambitious and expensive "all things to all people" pursuit of artificial general intelligence that OpenAI and others seem to be going for.

4. Amazon's valuation looks high, but actually isn't

Today, Amazon is valued at 33 times 2025 earnings estimates and 28.8 times 2026 earnings estimates.

That's not a demanding valuation for a leading technology company, but it's especially undemanding for a company like Amazon, which always reinvests lots of cash flow into new, innovative businesses.

Amazon has been growing its margins over the past year, with operating margin up from 5.6% to 7% in the North American e-commerce business, up from 0.5% to 3.4% in the International e-commerce business, and up from 33.4% to 36.8% in AWS.

Yet Amazon's business model is one of constant reinvestment -- for instance, in Project Kuiper. So while its current margin expansion has been exceptional, it stands to reason that if Amazon wanted to maximize margins, its profits would actually be significantly higher.

That makes Amazon actually much cheaper than the headline valuation numbers suggest.

5. CEO Andy Jassy isn't the founder, but has founder Jeff Bezos' management DNA

Finally, Amazon is led today by Andy Jassy, its CEO since founding CEO Jeff Bezos stepped back into the chairman role in July 2021.

While Jassy is no Bezos, he has been with Amazon since 1997 and was essentially Bezos' second-in-command for many years. Meanwhile, Bezos has said in recent interviews that he is still involved in Amazon's entrepreneurial ventures and has taken a strong interest in the company's AI efforts.

So investors should rest assured that Amazon has a younger CEO looking to make his mark following a much-lauded founder, sort of like Tim Cook did at Apple, but one who also has the same strategic and philosophical DNA as that founder.

That's a recipe for Amazon to continue delivering the type of success it has achieved for the last 30 years. In light of all that, the stock looks attractive today.

Billy Duberstein has positions in Alphabet, Amazon, Apple, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Nvidia, and Walmart. The Motley Fool has a disclosure policy.