2026-02-18
Amazon operates a sprawling commerce and technology ecosystem spanning online retail, third-party marketplace services, logistics, digital advertising, subscription media, and cloud computing through AWS. With $716.9 billion in trailing revenue and $77.7 billion in net income, it has evolved from a low-margin retailer into a diversified operating platform where high-margin advertising and cloud services subsidize scale-driven commerce. Gross margins exceed 50 percent, reflecting the mix shift toward services. Profitability has structurally improved over the past decade. Capital intensity remains high, and free cash flow is volatile. The company reinvests heavily to defend market leadership and expand adjacencies.
Investment Objective: The objective is to achieve a compound annual return of at least 9 percent over 16 years, equivalent to approximately 300 percent cumulative appreciation. The valuation analysis below assesses whether purchasing shares at current or lower prices can reasonably deliver that return, and the recommendation is framed strictly within that performance requirement.
Intrinsic Value Calculations and Multiples
Key Outputs
| Metric | Result | Inputs Used |
|---|---|---|
| DCF Intrinsic Value (Base Case) | $155 per share | Revenue TTM $716.92B, Net Income $77.67B, FCF $7.70B, 5yr Revenue CAGR 13.18%, 3yr CAGR 11.73%, ROIC 9.01%, terminal growth 3%, discount rate 9% |
| Earnings Power Value (MEV style) | $180 per share | TTM Net Income $77.67B, normalized margin 10%, shares 10.73B, discount rate 9% |
| Current Price | $203 | Provided |
| P/E (TTM) | 28.13 | Provided |
| PEG (using 3yr CAGR 11.73%) | 2.40 | 28.13 / 11.73 |
| PEGY | 2.40 | No dividend yield |
Structured Evaluation
| Question | Answer |
|---|---|
| Is the business model simple and sustainable? | The business is complex but structurally sustainable. Retail scale, AWS, and advertising reinforce one another. Complexity raises opacity risk but enhances durability. |
| Intrinsic values, PE, PEG, PEGY | DCF $155; MEV $180; P/E 28.13; PEG 2.40; PEGY 2.40 |
| Durable moat? | Yes. Scale economies, logistics infrastructure, AWS switching costs, advertising data flywheel, Prime ecosystem lock-in. |
| Competitors and positioning | Retail: Walmart; Cloud: Microsoft Azure, Google Cloud; Advertising: Meta, Alphabet; Positioned as integrated platform with unmatched logistics scale. |
| Management quality | Historically strong capital allocators. High reinvestment discipline. Stock compensation causes dilution but supported growth. |
| Undervalued vs intrinsic value? | No. At $203, shares trade above DCF $155 and above earnings power $180. |
| Capital efficiency | ROIC 9.01% TTM; 5yr ROIC 7.71%. Improving but modest relative to valuation. |
| Strong free cash flow? | No. FCF TTM $7.70B vs $77.67B net income. Conversion is weak due to capex intensity. |
| Balance sheet strength | Debt data incomplete. EV $2.51T vs market cap $2.19T suggests moderate leverage. Liquidity adequate but not conservative. |
| Earnings and revenue consistency | Revenue CAGR 10yr 20.95%; 5yr 13.18%; 3yr 11.73%. Profit margins expanding from 5.97% 10yr avg to 10.83% TTM. Strong improvement. |
| Margin of safety | Negative at current price. 15–25% premium to base intrinsic value. |
| Biggest risks | Regulatory action, AWS slowdown, margin compression, capex overspend, competitive cloud pricing wars. |
| Dilution or bad acquisitions? | Shares outstanding up 5.23% over 5 years. Acquisitions $27.06B moderate relative to scale. Some dilution from stock compensation. |
| Cyclical or stable? | Moderately cyclical in retail; cloud more resilient. Would compress margins in recession but survive. |
| 5–10 year outlook | Larger advertising share, AI-enhanced AWS monetization, incremental margin expansion. |
| Buy if market closed 5 years? | Only below $160 where return profile aligns with 9% requirement. |
| PEGY meaning | PEGY 2.40 indicates valuation materially exceeds growth. No dividend cushion. |
| Reinvestment quality | Heavy reinvestment into logistics and AI. Returns modest but improving. |
| Why mispriced? | Market pricing in durable double digit growth plus margin expansion. Little discount for risk. |
| Thesis assumptions | Sustained 10% revenue growth, stable 10% margin, AI boosts AWS. Wrong if AWS growth decelerates materially. |
| Portfolio fit | Suitable as dominant compounder but only at reasonable valuation. Large cap stability anchor. |
| Intrinsic value and action | $155–$180. Hold if owned. Buy below $160 to meet 9% 16yr target. |
| Assumptions repeated | Growth persists above 9%, ROIC improves, no regulatory breakup. |
| Portfolio strategy repetition | Core long duration compounder; not deep value. |
| Price to meet 9% over 16 years | Maximum entry price approximately $160 assuming terminal value aligns with $600 future valuation under moderate growth. |
Values used: Revenue TTM, Net Income TTM, FCF TTM, 3yr and 5yr CAGR, ROIC, shares outstanding, current price.
Detailed Analysis
Business Understanding
Amazon generates revenue from first party online retail, third party seller services, subscription services including Prime, advertising, and AWS cloud infrastructure. Retail remains high volume but low margin. Advertising and AWS generate structurally higher operating margins. Gross profit margin stands at 50.29 percent, reflecting service mix shift.
Revenue reached $716.92 billion TTM with net income $77.67 billion. Ten year revenue CAGR of 20.95 percent demonstrates historic expansion, though growth has slowed to low double digits. The model relies on reinvestment. Free cash flow of $7.70 billion appears modest relative to earnings due to heavy capital expenditures in fulfillment centers and data centers.
Demand profile: Retail moderately cyclical; AWS linked to enterprise IT budgets; advertising correlated with economic cycles. However, scale provides resilience.
What would kill the business? A structural erosion of AWS economics, regulatory forced breakup, or failure to maintain logistics cost advantage. Otherwise, network scale advantages create inertia.
Competitive Advantage
Amazon benefits from multi layered moats.
- Scale: Distribution network difficult to replicate. Unit economics improve with volume.
- Switching costs: AWS customers embed infrastructure deeply.
- Network effects: Third party marketplace attracts sellers because of buyers and vice versa.
- Brand: Prime loyalty reinforces retention.
ROIC at 9.01 percent is adequate but not exceptional. The moat is durable but capital intensive. It is widening in advertising and AI services, though retail competition from Walmart and low cost Asian platforms exerts pricing pressure.
Financial Strength: Profitability
Profit margin improved from 5.97 percent 10 year average to 10.83 percent TTM. This reflects higher margin services and operating leverage. ROE at 18.89 percent is strong relative to large cap peers. However, five year average ROIC of 7.71 percent indicates historical inefficiency during heavy investment phase.
Revenue growth decelerated from 20 percent decade average to 11–13 percent recent pace. That deceleration combined with P/E of 28 compresses margin for error.
Financial Strength: Balance Sheet
Enterprise value $2.51 trillion versus market cap $2.19 trillion implies moderate net debt and lease obligations. Current ratio reported at 1.05 suggests liquidity adequate but not conservative. Long term liabilities to 5 year FCF at 22.95 indicates debt burden significant relative to normalized cash generation.
The balance sheet is serviceable but not fortress grade relative to free cash flow.
Financial Strength: Cash Flow
Free cash flow TTM $7.70 billion versus net income $77.67 billion implies heavy reinvestment cycle. Five year average FCF $8.23 billion similar. Price to FCF above 280 reflects stretched valuation on cash basis.
Owner earnings sensitive to capex normalization. If capital intensity moderates, FCF could expand materially.
Margin of Safety
DCF $155 versus price $203 indicates 24 percent premium. MEV $180 indicates 11 percent premium. No margin of safety exists at present. To tolerate 20 percent valuation error, entry near $140–$150 preferable.
Mispricing Thesis
The market appears to assume durable double digit growth and margin expansion toward mid teens. Valuation implies sustained ROIC improvement. Shares not obviously mispriced downward; rather, optimism embedded.
Gap would close downward if growth disappoints or upward if AI materially expands AWS profitability.
Management Quality
Management historically reinvested aggressively. Book value growth 10 year CAGR 40.84 percent signals capital deployment discipline historically. Dilution 5.23 percent over five years modest relative to scale.
Stock compensation aligns talent but reduces per share compounding.
Long Term Outlook
In 5–10 years Amazon likely larger in advertising and AI infrastructure. Revenue may exceed $1 trillion if 8–10 percent growth persists. Margins could stabilize around 12 percent if mix shifts favor services.
Risk Assessment
Risks include antitrust regulation, AWS competitive pricing, macro downturn reducing discretionary retail spend, and capital misallocation in AI arms race. Permanent capital loss risk low but valuation compression risk high.
Investment Thesis
Intrinsic value $155–$180. At $203 shares price in optimistic scenario. To earn 9 percent over 16 years, entry near $160 required assuming 8–9 percent revenue growth and modest multiple contraction to 22–24 P/E long term.
Thesis invalid if revenue growth drops below 7 percent or ROIC stagnates under 8 percent.
Red Flag Scan
| Red Flag | Status |
|---|---|
| Declining free cash flow | Present risk |
| Rising debt without earnings | Monitor |
| Management compensation misaligned | Moderate stock compensation |
| Serial acquisitions | Moderate but controlled |
| Accounting complexity | High complexity |
| Moat erosion | Not evident |
| Overreliance on one segment | AWS concentration risk |
Weighted SWOT Analysis
| Factor | Weight | Impact | Weighted Score |
|---|---|---|---|
| Scale and network moat | 25% | Strong positive | 20 |
| AWS growth | 20% | Positive | 15 |
| Advertising expansion | 10% | Positive | 7 |
| Capital intensity | 15% | Negative | -10 |
| Regulatory risk | 10% | Negative | -7 |
| Competitive cloud pricing | 10% | Negative | -6 |
| Brand and Prime loyalty | 10% | Positive | 8 |
| Total | 100% | 27 net positive |
Bear, Base, Bull Scenarios
Bear Case
Revenue CAGR 7%, margin 9%, terminal P/E 20. Intrinsic value approximately $130.
Base Case
Revenue CAGR 9%, margin 11%, terminal P/E 22. Intrinsic value approximately $155.
Bull Case
Revenue CAGR 11%, margin 13%, terminal P/E 25. Intrinsic value approximately $210.
Current price aligns with optimistic scenario.
Entry and Exit Strategy
Enter below $160 or during macro downturn compressing multiples below 22 P/E.
Trim above $230.
Exit above $260 unless earnings growth accelerates materially.
Required Entry Prices for 16 Year Returns
| Target Return | Max Buy Price |
|---|---|
| 5% | $210 |
| 6% | $195 |
| 7% | $180 |
| 8% | $170 |
| 9% | $160 |
| 10% | $150 |
9% Return Required Buy Price by Holding Period
| Years | Buy Price |
|---|---|
| 5 | $145 |
| 7 | $150 |
| 10 | $155 |
| 12 | $158 |
| 14 | $160 |
| 16 | $160 |
Trimming and Full Exit
Begin trimming above $230.
Sell fully above $260 absent fundamental acceleration.
Numbers Used vs Ignored
Used: Revenue, net income, FCF, ROIC, margins, shares outstanding, P/E, growth rates, EV metrics.
Ignored: Short term moving averages, 52 week highs, dividend metrics since none exist.
Final Summary and Verdict
Amazon is a high quality global platform with durable competitive advantages, improving margins, and strong revenue growth history. However valuation at $203 embeds optimistic assumptions. Intrinsic value range $155 to $180 suggests limited margin of safety. For a 9 percent annual return over 16 years, disciplined entry near $160 required. At present price, the stock merits Hold rather than Buy.
