Key Points
Amazon’s cloud computing business accelerated in the fourth quarter, and AWS still appears constrained more by capacity than demand.
Amazon generated a staggering $139.5 billion operating cash flow in 2025.
A strong case can be made for 12% annualized returns in the stock price from here.
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At first glance, Amazon (NASDAQ: AMZN) shares don’t look cheap. The stock trades at about 35 times earnings as of this writing and about 31 times forward earnings. That is not exactly a bargain multiple for a company in the middle of one of the biggest spending cycles in its history as the era of artificial intelligence (AI) unfolds.
But I think that lens misses several important parts of the bull case for the stock. Indeed, I think the valuation is cheaper than it appears on the surface, once you consider Amazon’s momentum in key segments and its attractive price-to-operating cash flow multiple.
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Accelerating momentum
First, investors should consider the impressive trajectory of Amazon’s business.
The company’s fourth-quarter consolidated net sales rose 14% year over year to $213.4 billion, and revenue from Amazon Web Services (AWS), or its cloud computing business, increased 24% to $35.6 billion — an acceleration from 20% growth in the third quarter.
Further, this fast-growing business is contributing substantially to the company’s profits. AWS generated $12.5 billion in operating income in the quarter, or half of Amazon’s total operating income. Adding even more context, AWS accounted for just 18% of full-year sales but about 57% of operating income.
But the strongest reason to be bullish on Amazon stock over the next year and beyond is that AWS still seems to be gaining momentum, not losing it.
During Amazon’s fourth-quarterearnings call management said AWS growth hit its fastest pace in 13 quarters.
Even more, the business is supply constrained. So as long as Amazon can build enough capacity, its cloud computing business could accelerate further.
“Customers really want AWS for core and AI workloads. And we are monetizing capacity as fast as we can install it,” said CEO Andy Jassy in the company’searnings call
Then, of course, there are other fast-growing parts of Amazon’s business, including subscriptions and advertising.
Here’s a better way to look at the stock
In addition, I’d argue that a price-to-earnings ratio is the wrong way to evaluate Amazon stock’s attractiveness today.
Amazon‘s trailing-12-month operating cash flow rose 20% in 2025 to $139.5 billion. This means the stock trades at a price-to-operating-cash-flow ratio of about 19 — a far more attractive ratio than its mid-30s price-to-earnings ratio. And it arguably provides a clearer picture of the company’s current earnings power before its unusually heavy reinvestment cycle fully pays off.
The big spending cycle Amazon is in now is pressuring earnings and could be an even bigger drag in 2026. This is because these capital expenditures are being rolled into depreciation expenses over time. And with the company planning to spend about $200 billion on capital expenditures this year, those depreciation charges should only get bigger in the coming quarters.
But if Amazon does achieve an attractive return on its capital expenditures, as management expects, investors should want the company to spend heavily on this AI boom. And this is why I think Amazon’s price-to-operating cash flow ratio is a better way to look at the stock — it measures the company’s price relative to its cash from operations (cash flow from operations before capital expenditures). After all, as today’s investment cycle fades into the rearview mirror, depreciation expense growth eventually moderates, and demand hopefully benefits from today’s investments, Amazon’s capital expenditures should come down as a percent of revenue even as revenue growth remains strong — and earnings could inflect sharply.
Yes, Amazon’s earnings could be suppressed for years as today’s heavy investment cycle depreciates. But the market is forward-looking and may start pricing in an earnings inflection over time if today’s investments continue to show signs of paying off, as they did in Q4 when AWS revenue growth accelerated significantly.
So, where could the stock go?
I do not think investors should expect anything dramatic from Amazon stock over the next year. This is already a massive company, and though I think shares are attractive, they certainly aren’t a bargain.
But I do think 12% annual compounding from here looks reasonable. An expectation like this only requires Amazon to keep showing that AWS growth rates can remain elevated (or, better yet, accelerate), providing a proof point that Amazon’s big spending is paying off.
Using the stock price of about $248 as of this writing and a reasonable 12% annual compounding rate, shares reach around $278 in one year. And over five years, that same rate would put the stock at $437.
There are risks, of course. And it’s worth emphasizing that this is just a ballpark estimate. But I think this is a fair expectation given the significant acceleration in AWS revenue in Q4 and the company’s broad-based business momentum.
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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
