Over the past three months through July 31, Amazon's stock gained 2.5%, a figure that falls short of the company's strong presence in the cloud computing market. During the same period, the broader S&P 500 index rose 3.9%, highlighting the disparity in performance. Despite the lag in stock price, Amazon continues to hold a commanding position in the data center industry.
Amazon's retail and cloud operations split in performance
The majority of Amazon’s revenue in the first half of the year came from its North American and international retail segments, which accounted for 79% of total sales. However, these parts of the business contributed only 40% of the company’s operating profit. In contrast, the real earnings engine is the Amazon Web Services segment, which delivers high-margin profits. AWS, the cloud-computing business, saw a 36.8% surge in sales year-over-year, reaching $42.2 billion in the second quarter.
AWS currently leads the cloud computing market with a 28% share, surpassing Microsoft's 21% and Alphabet's 14%. Its competitive edge comes from high entry barriers, as rivals must invest heavily in constructing and maintaining large data centers to match AWS's vast infrastructure. This significant capital requirement limits the number of competitors and reinforces AWS's dominant position.
Stock valuation shifts after spending announcement
Amazon's stock faced a setback after the company revealed plans for $220 billion in capital expenditures for 2025, a sharp rise from the $131.8 billion budgeted in 2025. This spending spike, higher than the $200 million range initially forecast, unsettled some investors, who interpreted it as a sign of financial strain. However, management has explained that these expenditures are necessary to support rising demand. As a result of the market reaction and solid earnings, the stock's price-to-earnings (P/E) ratio has fallen to 22, nearly half of its five-year average of 50.
Today, Amazon's stock trades at a more attractive price than the S&P 500's P/E ratio of 29. This valuation discount, despite Amazon’s leading role in cloud computing and online retail, could be a strong signal for long-term investors. With AWS spearheading a rapidly expanding industry and the company still capturing 36% of U.S. e-commerce sales by 2025, Amazon offers a compelling investment opportunity at a price that may be undervalued both historically and in comparison to broader market averages.