Amazon's 2026 Comeback: A Growth Investor's Analysis of TAM and Scalability

Amazon's 2025 was a story of missed expectations. While the broader market soared, the stock rose only $6%, trailing the S&P 500's 18% gain. This underperformance, which left it as the worst-performing "Magnificent Seven" member, created a valuation gap that sets the stage for a potential 2026 comeback. The core thesis is straightforward: if Amazon's high-margin, scalable divisions can sustain their growth, the stock's depressed price offers a clear path to outperformance.

The catalyst for that rebound is already in motion. The company's two most profitable engines-Amazon Web Services and advertising-are showing renewed strength. AWS revenue grew 20% year over year last quarter, its fastest pace in years, and accounted for 66% of operating profits. At the same time, advertising services posted the fastest growth rate of any division, up 24%. These segments are the scalable profit drivers that can lift the entire company's operating margin and earnings growth, which Wall Street expects to outpace its 11% sales growth forecast.

Wall Street sentiment, while cautious, is overwhelmingly positive on the outlook. A staggering 96% of sell-side analysts rate Amazon a Strong Buy or Buy, with top picks like Evercore ISI's Mark Mahaney calling it his top pick for 2026. Mahaney and others point to reaccelerating AWS growth, new AI chip demand, and a ramp in advertising as near-term catalysts. The average price target implies roughly 27% upside, a clear vote of confidence that the underperformance is seen as a temporary blip, not a fundamental flaw.

The bottom line is a classic value opportunity masked as a growth story. Amazon's stock is cheap because of a disappointing year, but its business fundamentals in cloud and advertising are robust. The comeback thesis hinges on execution, but the setup is favorable: a reasonable valuation, powerful profit engines gaining momentum, and a Wall Street consensus that is ready to reward a return to form.

AWS: The Scalable Engine with a Clear TAM

Amazon Web Services is no longer just a profitable segment; it is the reaccelerating engine of the entire company. In the third quarter, AWS revenue grew 20% year-over-year, marking its fastest pace in multiple years. This growth is not a marginal uptick but a fundamental reacceleration, outpacing Microsoft Azure for the first time since mid-2022. More importantly, this cloud powerhouse continues to be the primary profit driver, accounting for 66% of operating profits in the quarter. For a value investor, this is the hallmark of a durable moat: a business that is both scaling rapidly and generating the vast majority of the company's cash.

The trajectory is being turbocharged by artificial intelligence. The most concrete evidence of AWS's strategic positioning is the $38 billion, seven-year agreement with OpenAI. This multi-year commitment secures immediate and increasing access to AWS's infrastructure for OpenAI's core AI workloads, including hundreds of thousands of GPUs. The deal is a direct vote of confidence from a leading AI innovator, validating AWS's ability to provide the massive, reliable compute required to train and serve frontier models. It also locks in a significant portion of AWS's future capacity expansion, providing a clear and substantial tailwind for the next several years.

Amazon is not merely a passive provider of compute; it is actively engineering its way deeper into the AI value chain to capture more margin. The company's heavy investment in proprietary AI chips, exemplified by the new Trainium3 UltraServers, is a critical part of this strategy. These purpose-built chips offer substantial performance and efficiency gains, allowing AWS to offer differentiated, lower-cost infrastructure. Early customers report reducing training and inference costs by up to 50% compared to alternatives. This vertical integration is a classic move to improve the economics of a core business, potentially boosting AWS's margins over time as it reduces reliance on third-party hardware.

The bottom line is a segment with a clear and expanding total addressable market. AWS is scaling to meet AI demand, securing a massive anchor tenant in OpenAI, and investing heavily in the proprietary technology needed to maintain its competitive edge. For a patient investor, the current valuation of Amazon's stock, which has lagged its peers, may not fully reflect the power of this reaccelerating engine. The growth in AWS is not speculative; it is backed by a multi-billion dollar contract and a strategic push to own more of the AI infrastructure stack.

Advertising and Commerce: Margin Expansion and Market Dominance

Amazon's advertising business is the engine driving its core commerce profitability, and its scalability is a key pillar of the company's future. In the third quarter, advertising services grew at a 24% year-over-year rate, the fastest of any division. This growth is not just about top-line expansion; it is critical for boosting margins. The segment generated $17.7 billion in revenue last quarter, and applying a typical advertising operating margin of 30% to 40% suggests it contributed roughly $5.3 billion in operating profit. That figure is nearly as large as the combined $6 billion in operating profits from North American and international commerce. In other words, advertising is a high-margin profit center that directly subsidizes the lower-margin e-commerce operations, creating a powerful financial synergy.

This synergy is built on a massive, albeit competitive, Total Addressable Market. Amazon holds a 37.6% share of U.S. e-commerce, a dominant position that represents over $447 billion in annual revenue. While this share has slightly declined from 37.8% the previous year, it underscores a market that is stabilizing after pandemic distortions. The company's moat is not just in its size but in its integrated ecosystem: the advertising platform leverages real-time purchase data from its marketplace to offer unparalleled targeting precision, a network effect that is difficult for competitors to replicate.

The company is now shifting its fulfillment model to further improve its own operating leverage. Starting January 1, 2026, Amazon will end its practice of labeling and packaging items for sellers in its Fulfillment by Amazon (FBA) program. This change transfers a significant cost and operational burden to third-party sellers. While this may pressure seller margins and could lead to higher prices for consumers, it directly improves Amazon's own cost structure and capital efficiency. The company is effectively monetizing its logistics network by charging sellers for services it previously provided at cost, a move that should enhance its own profitability over time.

The bottom line is a business model where advertising scales efficiently, commerce margins are propped up by a high-margin adjacent business, and the company is actively optimizing its cost base. For a value investor, this setup suggests a durable path to operating leverage. The challenge is execution: maintaining advertising growth while navigating the competitive pressures on its core e-commerce share. The recent shift in fulfillment costs is a strategic bet that Amazon can improve its own economics without sacrificing the seller ecosystem that fuels its marketplace.

Valuation, Capital Intensity, and Key Risks

Amazon's valuation has reset, but the new price is now a direct function of its capital intensity. The stock's P/E ratio has fallen to 32.0, trading in line with peers after a 24% drop from its 2024 high. This makes the stock more sensitive to earnings growth, as the market is no longer paying a premium for future potential alone. The company's financial demands for its AI future are now clear and massive. In the third quarter, capital expenditures surged 61% year-over-year to $34.2 billion, bringing the annual total to $89.9 billion. To fund this expansion, Amazon is raising debt, targeting a $12 billion bond sale to support its capital expenditure and business growth. This level of investment signals a fundamental shift: Amazon is now a capital-intensive infrastructure play, not just a consumer tech company.

The primary risk to the investment thesis is execution on monetizing this colossal bet. The company's stock performance in 2025 reflects market skepticism, with shares up only 6% year-to-date versus an 18% gain for the S&P 500. Analysts cite slowing sales growth in AWS and mixed sentiment on AI monetization as key drivers. The company's recent largest-ever round of layoffs underscores the pressure to control costs while ramping up spending. The path to profitability from this investment is uncertain and will take years, creating a volatile earnings trajectory in the interim.

Competition and external pressures add further friction. In cloud and advertising, Amazon faces intensifying rivalry, which could pressure its core growth engines. More broadly, the environmental and regulatory scrutiny of its massive data center expansion is mounting. The scale of this build-out-doubling computing capacity since 2022 with plans to double again by 2027-raises concerns about energy consumption and water use, which could lead to operational delays or higher costs. The recent bond sale itself highlights market strain, with analysts noting the "sudden onslaught of supply is weighing a bit on the market."

The bottom line is a company at a capital crossroads. Its valuation now reflects the high cost of its strategic pivot, with the stock's sensitivity to earnings growth a direct result. The margin of safety, if any, depends entirely on Amazon's ability to convert its $12 billion debt-funded AI infrastructure into sustained, profitable revenue streams. For a value investor, the risk is not a cheap price, but a very expensive bet on execution.