Unreasonable Decline of Amazon Stock in Q1 2025

I have been heavily buying Amazon stock recently as the stock declined significantly due to tariff uncertainty. I have heard so many people talking about how Amazon imports large amount of product from China and how the tariff will destroy Amazon’s business. I completely disagree.

The bearish outlook usually come from the figure below:

Amazon’s retail business generates 67% of total revenue, including online stores, 3rd party seller services and physical stores. This may seem a lot, but it actually doesn’t. If you instead take a look at the operating income breakdown, it paints a completely different picture:

This figure shows the operating income breakdown of the three business segments of Amazon as of Q2 2024. At that time AWS only earned 15% of the total revenue but already accounted for 50% of the operating income. AWS revenue also continues to grow at a significant higher rate compared to retail businesses, at 17% in Q1 2025 compared to about 6%. One thing to notice in this diagram is that the North America and International business segment does not only include the retail business, but also the advertising and subscription businesses. I don’t expect the tariff will have much effect on the later 2 businesses, which also delivers consistent high growth and operating margin that allows them to take up more and more shares of the total operating income. You can observe this trend in the third attached picture below.

In the most recent quarter, Amazon delivered 9% revenue growth and an operating income of $18.4 billion, a 20% growth YoY. AWS operating income was $11.5 billion, which takes up 62.5% of the total operating income. This figure was 50% less than a year ago. Amazon’s operating margin has improved 1% YoY as all of its high-margin businesses grew at faster rates compared to the retail business, and a 1% margin expansion is significant on top of Amazon’s $637 billion revenue. I expect the margin expansion to continue in the next few years and I expect the tariff impact will be insignificant. The tariff may also help Amazon take more market shares as weaker competitors fail to adapt to the new environment.

The estimated fair price of Amazon stock is about $251 per share using the DCF model, indicating a 15.9% CAGR in the next 5 years. As usual, I run Amazon valuation using operating cash flow because of the significant ongoing capex:

Latest TTM Operating cash flow (OCF) $113.903 Billion
OCF annual growth rate of 15% (5YR AVG 23.45%)
Share dilution of 1.3% per year (5YR AVG 1.3%)
Future Price/OCF ratio of 20 (5YR AVG 24.5)
Discount rate of 10%

I believe Amazon stock is undervalued after the recent price decline and I will continue holding the stock for the long term.

You can also see all my past Amazon stock analysis using this link.

Holdings Disclosure

SoloFIRE AMZN ownership: 11% of portfolio
SoloFIRE AMZN Average Cost Paid: $141.54
Holding time: 3 years

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.