Amazon Earnings Show Why the Stock Is a Buy

As the biggest cloud provider, Amazon (NASDAQ: AMZN) has been a major beneficiary of the AI (artificial intelligence) boom. But this isn't the only area the company's diversified business is seeing strength. The e-commerce and cloud-computing specialist is seeing broad-based momentum across its business and is benefiting from major tailwinds likely to persist for years.

Yet somehow, shares have underperformed the S&P 500 so far this year. Additionally, the stock's forward price-to-earnings multiple is quite conservative relative to the company's undeniable momentum in a number of important areas.

In short, Amazon's latest earnings report makes the bull case for the stock difficult to ignore.

Image source: Getty Images.

A handful of catalysts

Amazon's third-quarter results left little to critique. Third-quarter net sales rose 13% year over year to more than $180 billion, with the company's revenue from Amazon Web Services (AWS) -- Amazon's cloud computing division -- rising 20.2% to $33 billion, accelerating from 17.5% growth in the prior quarter. That outsize growth in cloud matters because AWS is the company's most profitable segment, and AI demand is expanding both core cloud workloads and next-generation infrastructure needs.

"We continue to see strong momentum and growth across Amazon as AI drives meaningful improvements in every corner of our business," said Amazon CEO Andy Jassy in the company's third-quarter earnings release. "AWS is growing at a pace we haven't seen since 2022..."

But there was notable momentum not just in cloud but in every key area of the company's business.

For instance, revenue from its online stores segment (sales from the products Amazon sells directly on its websites) increased 10% year-over-year $67.4 billion. Meanwhile, third-party seller services, or marketplace commissions along with related fulfillment and shipping fees, rose 12% year-over-year to $42.5 billion as more merchants use Amazon's logistics and storefront tools. And advertising services (sponsored listings and display/video placements sold to sellers, brands, publishers, and others) climbed 24% year-over-year to $17.7 billion. Finally, Amazon's subscription services revenue, which includes Prime membership fees and non-AWS digital subscriptions (video, music, audiobooks, and more), reached $12.6 billion -- up 11% year over year.

One downside was that the quarter's operating income came in flat compared to the year-ago period, but that was after two sizable non-recurring charges for a legal settlement and severance. Without those items, operating income would have been $21.7 billion, up about 25% year over year.

But trailing-12-month free cash flow decreased from $50.9. billion in the same period a year ago to $14.8 billion, driven by a sharp year-over-year increase in capital expenditures as Amazon builds capacity for AI workloads and faster delivery. This shows that the company's growth profile is coming at a huge cost (at least as measured by the cash flow statement). But you could reframe how you look at this and note the upside: Amazon still has significant growth opportunities to invest in -- even at its size.

Is the stock a buy?

Of course, cracks could develop in the bull case for the stock. Competition in cloud from Microsoft and Alphabet, for instance, is intense. Additionally, macro pressure could weigh on discretionary shopping and advertising budgets. And then, of course, there's the massive cost of the company's AI investments; the company's aggressive data center build-out will keep free cash flow suppressed and will likely weigh on the company's balance sheet health. Of course, those same investments may expand Amazon's scale advantages in cloud and help the company better capitalize on growth opportunities.

Overall, Amazon is demonstrating impressive momentum for a company of its size. AWS is accelerating, the marketplace is growing, ads are scaling, and subscription growth remains robust. A forward price-to-earnings multiple of 29 looks attractive for a scaled leader with a growth profile like this.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.