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Amazon's e-commerce business is gaining good momentum as 2026 approaches.
The cloud computing and advertising segments continue to post incredible results.
Amazon (NASDAQ: AMZN) hasn't been nearly the winner that many hoped it would be in 2025. The S&P 500 is up around 16% for 2025 so far, while Amazon has lagged the market with just shy of 7% returns. When most investors compare Amazon to other stocks, they're normally comparing it to other "Magnificent Seven" stocks. If you compare Amazon to that cohort, it's essentially tied with Tesla as the worst performer this year.
That's obviously disappointing for investors, but we're not concerned about the past; we're focused on the future. The real question is, has Amazon's underperformance set it up for a great 2026? Let's take a look and see if Amazon should be at the top of investors' shopping lists to close out the year.
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Image source: Getty Images.
Most people think that Amazon's business is just centered around its e-commerce site. While that makes up the majority of what Amazon does, it doesn't account for everything. Furthermore, these other businesses generate the majority of Amazon's profits, so keeping an eye on how they're doing is critical.
Starting with Amazon's e-commerce segment, in the third quarter, Amazon posted 10% year-over-year growth -- one of the best quarters it has posted in a long time. Its third-party seller services rose 12%, the best this segment has done in a long time as well. With just these two pieces of information, you may be confused as to why Amazon's stock has performed so poorly. However, the big issue with Amazon's stock is its valuation.
Throughout most of 2025, Amazon's stock has traded for a premium valuation, despite growing at a slower rate than its peers. With Amazon's stock averaging around 30 times forward earnings, the stock wasn't cheap, especially with its growth rates hovering around the 10% range.
AMZN PE Ratio (Forward) data by YCharts.
With Amazon already being a richly valued stock and only posting OK growth rates, it held back some of its potential. However, investors need to focus on a different growth metric from revenue, as it doesn't tell the whole story.
While the majority of Amazon's revenue comes from its e-commerce division, the majority of Amazon's profits come from other business units.
The largest contributor is Amazon Web Services (AWS), its cloud computing division. Cloud computing is seeing a huge boom thanks to all the artificial intelligence workloads that are coming online. It's also experiencing another secular tailwind driven by companies looking to migrate from on-premise computing to cloud computing. This dual growth wave boosted AWS' revenue by 20% in Q3 -- the best mark in a long time.
AWS' biggest contribution to Amazon isn't its revenue, as it only made up 18% of sales during Q3. However, it made up 66% of operating income. AWS is far more profitable than other Amazon business units, and helps contribute more to the bottom line than it does to the top line.
Another segment that is delivering similar results is Amazon's advertising services. Amazon has a gold mine of information about consumers, as they visit Amazon's website when they want to buy something. That gives Amazon an advantage over its competition, which is why ad services grew revenue at an impressive 24% pace in Q3.
Unfortunately, Amazon doesn't split advertising out as its own business unit, as it does with AWS. However, we know from other advertising-focused companies (like Meta Platforms or Alphabet) that their margins are likely quite high. This helps boost Amazon's overall total, and leads me to why I think Amazon's stock is worth its price tag today.
Amazon's fastest-growing segments are also its highest-margin ones, so profits are slated to rise faster than revenue. As a result, Amazon's stock isn't as expensive as it appears. I think the trend of AWS' growth accelerating and advertising strength will continue. This should allow Amazon to post a strong 2026, making it a great buy entering the new year.
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Keithen Drury has positions in Alphabet, Amazon, Meta Platforms, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Tesla. The Motley Fool has a disclosure policy.
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