The 1 Reason I'm Never Selling Amazon Stock: A Value Investor's Perspective

The true measure of a business is not its size today, but the durability of its competitive advantages. For Amazon, that durability is defined by a wide economic moat-a fortress built on scale, network effects, and intangible assets that protect its profits over the long cycle. This is the classic value investing thesis: identify a business with a wide moat, buy it at a reasonable price, and let compounding work. The evidence shows Amazon's moat is not just intact; it is being reinforced by its core operations.

The foundation of this moat is a massive, loyal customer base. Amazon Prime has now reached 200 million members in the US, a figure that represents more than just a user count. It is a powerful engine for recurring revenue and deep customer loyalty. With over 200 million users, Prime secures a steady flow of predictable income, which in turn supports the company's vast logistics network and content ecosystems. This creates a high switching cost for customers and a reliable revenue stream that funds further investment, strengthening the entire platform.

At the heart of Amazon's profitability is its cloud unit, AWS, which operates with a fortress-like margin. In the third quarter, AWS generated $33.0 billion in revenue and $11.4 billion in operating income, translating into a 34.6% operating margin. This level of profitability is a direct result of the network effects and scale advantages that define the moat. The more customers AWS attracts, the more efficient its infrastructure becomes, driving down costs and protecting margins. This high-margin business is the financial engine that funds the company's aggressive expansion in AI and logistics, creating a self-reinforcing cycle of investment and return.

This combination of scale and network effects is what creates a wide moat. Amazon's vast distribution network and economies of scale allow it to operate with low costs, while its marketplace thrives on a flywheel where a large base of customers attracts more sellers, enhancing the value for all. These intangible assets-its brand, logistics algorithms, and cloud infrastructure-are not easily replicated. The historical performance of such businesses underscores the investment case. Over the past decade, companies with a wide economic moat delivered an average return of +645%, far outpacing the +188% return of the broader market. Amazon's journey from a garage bookstore to a $2.5 trillion behemoth is a living example of this principle in action.

The bottom line is that Amazon's moat is structural and durable. It is built on a foundation of 200 million Prime members, powered by the high-margin engine of AWS, and reinforced by network effects and scale. For a value investor, this is the kind of business that justifies a long-term hold. The market's recent skepticism reflects a demand for proof of future growth, but the underlying competitive advantages remain wide and deep.

The Financial Engine: Profitability, Investment, and Cash Flow

Amazon's financial engine is a study in structural tension. At its core is a high-margin powerhouse, AWS, which generates the profits that fund a massive, capital-intensive build-out. This cycle is compressing free cash flow in the near term but is being sustained by a robust operating cash flow engine.

The profitability driver is clear. In the third quarter, AWS delivered $11.4 billion in operating income, a 9% year-over-year increase, on $33.0 billion in revenue. This translates to a commanding 34.6% operating margin. This segment is the strategic lynchpin, providing the financial muscle to invest in the future. Its growth is accelerating, with AWS sales up 20% year-over-year, and it carries a significant backlog of future demand, providing visibility for its investment plans.

That investment is now a primary focus. Amazon is in a heavy build phase, with capital expenditures expected to hit $125 billion in fiscal 2025. The company plans to spend more than $125 billion on capex in 2026, with further increases likely. The scale is staggering, dwarfing the company's own historical spending. This is not a minor upgrade; it is a fundamental expansion of its infrastructure, driven by the AI race.

The strategic focus is squarely on AI infrastructure. The company has added more than 3.8 gigawatts of data center power in the past 12 months, a capacity boost that exceeds any other cloud provider. This is exemplified by the $11 billion Project Rainier data center, now operational and housing nearly half a million custom Trainium2 chips for its partner Anthropic. This is a multi-year commitment to secure its position in the AI stack, from custom silicon to massive compute clusters.

This heavy investment cycle is the direct cause of the recent cash flow compression. For the trailing twelve months, free cash flow decreased to $14.8 billion, a sharp drop from the prior period. The primary driver was a year-over-year increase of $50.9 billion in purchases of property and equipment. In other words, the company is spending far more than it is generating in free cash flow right now.

Yet the engine is not broken. The operating cash flow remains robust, having increased 16% to $130.7 billion over the same period. This strong operating cash flow is the critical bridge, funding the capex without resorting to excessive leverage. It demonstrates that the underlying business is generating ample cash, even as it is being reinvested at an unprecedented scale. The financial model is one of deliberate sacrifice: current free cash flow is being traded for future capacity and competitive advantage. The question for investors is whether the returns on this colossal investment will eventually flow back to the bottom line, justifying the temporary compression.

Valuation and the Margin of Safety: Price vs. Intrinsic Value

The market's current price for Amazon reflects a premium bet on future dominance, but a deep dive into valuation metrics reveals a significant disconnect between that price and a conservative estimate of intrinsic value. The stock trades at a forward price-to-earnings ratio of 34.96, a multiple that demands not just continued high growth, but a successful execution of its massive AI investment cycle. This is not a cheap stock; it is a bet on a future where Amazon's cloud and AI moats generate profits at a scale that justifies today's lofty valuation.

A discounted cash flow model under conservative assumptions underscores this tension. Using a 10% discount rate and a 3% terminal growth rate, the analysis projects an intrinsic value of just $71 per share. With the stock trading around $230, this implies a negative margin of safety of roughly 72%. In other words, the model suggests the market is pricing in a future of robust growth and expanding profitability that is not reflected in this baseline forecast. The model's inputs-forecasted free cash flows ramping from $25 billion in 2025 to $65 billion by 2029-represent a steep climb that must be achieved to support the current price.

This valuation premium is playing out in stark performance divergence. While the business engine is accelerating, the stock's share price has struggled to keep pace with the broader market. In 2025, Amazon's shares gained roughly 6%, a figure that lagged the S&P 500's double-digit returns. This disconnect is telling. It highlights a market that is skeptical of the near-term payoff from the company's aggressive capital expenditure, which is projected to exceed $125 billion in 2026. Investors are effectively saying that the cash being burned today to build AI capacity is not yet being valued as a future profit stream. The stock's performance is a direct reflection of this wait-and-see sentiment.

The bottom line is one of high expectations and thin margin for error. Amazon's valuation is a function of its immense scale and potential, but it leaves little room for missteps. The forward P/E of 35 demands flawless execution on its AI monetization and capex efficiency. The DCF model's low intrinsic value estimate serves as a stark reminder that even a conservative view of future cash flows fails to support the current price. For a value investor, this creates a challenging setup: the business may be compounding wealth at a historic pace, but the stock's price already assumes that future is secure.

Catalysts, Risks, and What to Watch

The investment thesis for Amazon hinges on a few critical future events and metrics. Success will be determined by its ability to navigate a regulatory trial, convert massive spending into profit, and defend its cloud crown against fierce rivals.

The most immediate regulatory overhang is the scheduled bench trial for the FTC antitrust case, set for October 2026. This is a significant risk that could force structural changes to Amazon's business. The case scrutinizes the company's algorithms and its treatment of third-party sellers, with the potential for remedies that alter how it operates its marketplace. The outcome of this trial will be a major test of the durability of its core retail moat.

Financially, the company's future is tied to the execution of its colossal capital investments. Amazon plans to spend more than $125 billion on capital expenses in 2026, with further increases expected. This spending, primarily on AI and cloud infrastructure, is a direct response to competitive pressure but also a major risk. The key metric to watch is the return on this capital. The company's recent free cash flow has been pressured by this capex, falling to $14.8 billion over the trailing twelve months. Investors must monitor whether these billions translate into sustainable profit growth or simply maintain market share in a capital-intensive race.

The competitive dynamics in the cloud market are the clearest signal of this pressure. While AWS remains the world's top provider, its growth is being challenged. In the third quarter, AWS revenue grew 20% to $33 billion, a solid beat but a step down from its own prior pace. This growth is now under pressure from rivals: Microsoft Azure reported 40% growth and Google Cloud 34% growth in the same period. The race is on not just for market share but for the most profitable AI workloads. AWS's ability to maintain its leadership and margin expansion against these aggressive competitors will determine the health of its cash engine.

The bottom line is that Amazon's path forward is defined by three watchpoints: the October 2026 FTC trial, the return on its $125B+ capex, and its ability to defend its cloud lead against 30-40% growth from rivals. The company's immense scale provides a buffer, but these are the specific catalysts that will determine if its moat widens or narrows.