An investment thesis doesn’t have to be overly complicated. Instead, there can be just a handful of reasons why you think a stock will succeed. For Amazon (AMZN -0.56%), I think there’s one compelling reason it will be a winning investment.
While there are other reasons why Amazon will be a winner in 2025, I really only need one: Amazon Web Services (AWS). AWS is my No. 1 reason to own Amazon stock, and it looks primed to lead Amazon next year.
The cloud computing revolution is still in its early stages
AWS is Amazon’s cloud computing service. Cloud computing has become extremely popular, giving clients access to easily scalable computing power. For example, a client could use a certain amount of computing capacity to run its everyday operations, but it can also rent high-powered GPUs (graphics processing units) for a set time period to train an AI model. Not every company needs to have a dedicated server for training AI, which is why using a cloud computing option like AWS is a great idea.
Furthermore, when this computing work is outsourced to a cloud computing provider, the clients don’t have to worry about servers breaking down, maintenance, or employing people to do that work. That all falls on Amazon’s shoulders.
However, we’re not at a point where everything is done on the cloud. This is why Grand View Research (along with many other firms) projects massive growth in the cloud computing space over the next few years. They believe the cloud computing market is set to grow from $602 billion in 2023 to $2.39 trillion by 2030. That’s a compound annual growth rate (CAGR) of 21.2%, impressive considering the industry’s overall size.
AWS won’t be able to capture all the pieces of that pie, but with Amazon holding the top spot in terms of infrastructure market share, it’s well-positioned.
Cloud computing is a huge shift in general computing infrastructure, but it’s also benefiting from the various artificial intelligence (AI) workloads that are popping up. This provides massive tailwinds for Amazon, as AWS makes up a significant chunk of its business.
AWS has caused Amazon’s stock price to swell
There are several other companies with solid cloud computing offerings, but none affect the overall business more than AWS does with Amazon. That’s because Amazon’s primary business is made up of fairly low-margin commerce sales, while AWS provides a huge profit boost.
In Q3, AWS made up 17% of overall sales, yet accounted for 60% of operating income. That’s because AWS has an incredibly strong operating margin, coming in at 38% compared to its North American commerce division’s 5.9% margin. As long as AWS can maintain its profit margins and continue growing at its current 19% year-over-year pace, Amazon as a whole will continue to succeed and rapidly grow profits.
This is also why Amazon shares command a fairly high premium compared to its tech peers:
AMZN PE Ratio (Forward) data by YCharts
At 44 times forward earnings, Amazon isn’t cheap. However, with more than half of its profits tied to a high-margin and high-growth sector, it starts to make sense why Amazon is valued at a similar level to Nvidia.
Cloud computing should continue to see huge growth over the next several years, and AWS is primed to capitalize on that growth. I think that is a very compelling reason to buy and hold Amazon stock for 2025, although there are still other reasons why Amazon is a buy heading into 2025 besides AWS.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
