Amazon (AMZN)

Amazon is a top-quality business with three complementary engines: a dominant commerce operation that leverages the densest logistics network in the West, AWS — the largest and most profitable cloud — and a high-margin $69bn advertising machine. Operating income compounds strongly (from $36.9bn in 2023 to $93.7bn over the trailing twelve months) as the retail margin expands and AWS mixes upward. The flip side is record capex ($173.0bn over the trailing twelve months) that sinks cash flow today and has to be judged on its return, and an accounting net income inflated by investment revaluations that forces attention on operating income.

It is valued by the sum of the parts: each segment with its own metric and its own exit multiple (AWS at a high EV/EBIT for the cloud, commerce at a retail multiple). Advertising is not separated as a piece —Amazon reports it as revenue, with no operating income of its own— but is embedded in the margin of the commerce segments, which is where it is recognized.

The base scenario projects a value of ~$328 per share over five years, an annual return of ~+5% from the current ~$261. At today's price the stock trades at ~30× operating income and cheapens toward ~13× over five years as the operating income compounds. The rich entry is the price of a quality business that still grows.

The verdict is Fairly valued: It trades close to intrinsic value, far from the required margin of safety.. The method's scale asks 4% to cover inflation, 10% to match the average return of equities and 15% for a great investment; at ~$261 the expected return (~+5%) has to be read against that scale, and today it sits in the low band. The company compounds value, but the discount to its value today is thin: the quality is being paid for almost in full. The margin, if it appears, would come from AWS and advertising compounding faster than the base, from AI capex earning above the 10% bar, or from a lower entry price — and it is worth noting that the return is close enough to the 4% threshold that a moderate move in the price would cross it in either direction.

The central test is capital allocation: the ~$173bn of annual AI capex has to earn above the 10% bar, and it is the only front where the evidence still falls short — invested capital grew ~$250bn in a year and the revenue that justifies it has not arrived. The other two fronts have already moved in favor and therefore stop being the question: AWS re-accelerated to its fastest pace in eighteen quarters with the contracted backlog jumping to $496bn, and AWS's margin expanded again to 36.8% instead of continuing to give ground. What remains to watch is the expansion of the retail margin toward the cash flow inflection — the most sensitive assumption in the valuation, which asks North America to go from 7.4% to ~10% — and global antitrust scrutiny.