Is Amazon (AMZN) Overvalued Amid Strong Earnings and Growth in AWS? A DCF-Based Analysis

Amazon.com (AMZN) has long been a bellwether for tech-driven growth, with its recent performance fueled by surging demand for cloud computing and artificial intelligence (AI) services. In 2025, Amazon's AWS segment reported a 20% year-over-year revenue increase in Q3, with a backlog of $200 billion and unannounced deals exceeding Q3's total volume. These metrics underscore AWS's dominance in the cloud market, yet they also raise a critical question: Is Amazon's stock overvalued despite its strong earnings and growth? To answer this, we turn to discounted cash flow (DCF) analysis, a valuation method that hinges on assumptions about free cash flow (FCF), weighted average cost of capital (WACC), and growth-stage duration.

DCF Valuation: A Framework for Assessing Intrinsic Value

DCF models estimate a company's intrinsic value by discounting projected future cash flows to their present value. For Amazon, this requires reconciling its high-growth segments (like AWS) with capital-intensive investments and varying WACC estimates. As of Q4 2025, Amazon's trailing twelve months (TTM) FCF stood at $25.9 billion, down from $38.2 billion in the prior year, due to capital expenditures (capex) surging to $115.9 billion in 2024 and projected to rise further to $125 billion in 2025. This capex is largely directed toward AI-driven infrastructure, including data centers, which are critical for sustaining AWS's growth.

Despite the FCF decline, Amazon's operating cash flow (OCF) remains robust, with a TTM OCF of $130.691 billion in Q3 2024 and a 18.9% margin. Analysts project OCF could reach $163.28 billion in 2025 if revenue hits $785.38 billion, even with capex climbing to $130 billion. This would yield FCF of approximately $33.28 billion, suggesting a potential long-term improvement in financial performance.

WACC and Discount Rate: A Range of Assumptions

The WACC, which reflects the cost of equity and debt, is a pivotal input in DCF models. As of Q4 2025, Amazon's WACC is estimated at 11.94%, though other sources report figures ranging from 7.33% to 10.0%. These discrepancies stem from differing methodologies and data inputs, such as market risk premiums and debt-to-equity ratios. A higher WACC, like 11.94%, would significantly reduce the present value of future cash flows, while a lower WACC (e.g., 7.33%) would inflate intrinsic value estimates.

For example, a DCF model using a 10% discount rate and a 3% terminal growth rate calculates Amazon's intrinsic value at $178.04 per share, while another model with a 10% discount rate and 4% terminal growth rate arrives at $205.02. The current market price of $230.82 implies a 23% overvaluation relative to the lower estimate and a smaller premium relative to the higher one.

Growth-Stage Duration: How Long Can Amazon Sustain High Growth?

DCF models typically assume a two-stage growth profile: a high-growth phase followed by a terminal phase with lower growth. For Amazon, the high-growth phase is often modeled as 5–10 years. AWS's projected 20–22% compound annual growth rate (CAGR) through 2030 supports the case for an extended high-growth period, particularly given its leadership in cloud computing and AI. However, Amazon's overall revenue growth is expected to moderate to 8–10% annually as it matures.

This moderation is critical for DCF modeling. If Amazon's FCF grows from $25 billion in 2025 to $65 billion by 2029, the terminal value-calculated using a 3% growth rate and 10% discount rate-would be $957.1 billion. This scenario suggests a fair valuation, but it hinges on the assumption that AWS's growth can offset slower gains in other segments like retail and advertising.

Terminal Growth Rate: A Key Point of Contention

The terminal growth rate, which represents the long-term growth assumption after the high-growth phase, is one of the most debated inputs in DCF analysis. Most models use a 3% terminal growth rate, aligning with long-term GDP growth expectations. However, a 4% rate could justify a higher intrinsic value, especially if AWS's margins continue to expand.

For instance, a 3% terminal growth rate in a DCF model with a 10% discount rate yields an intrinsic value of $178.04, while a 4% rate increases it to $205.02. These differences highlight the sensitivity of DCF results to growth assumptions.

Valuation Discrepancies and Market Implications

The range of DCF-derived intrinsic values-from $71 to $305 per share-reflects the uncertainty surrounding Amazon's future cash flows. At the lower end, the $71 estimate assumes a rapid moderation in growth and a high WACC, while the $305 figure incorporates optimistic assumptions about AWS's dominance and margin expansion. The current market price of $230.82 sits between these extremes, suggesting that investors are pricing in a moderate growth scenario.

However, this valuation also depends on whether Amazon can maintain its OCF margin of 18.9%. If OCF declines due to rising capex or margin compression in retail, the intrinsic value could fall below $178.04. Conversely, if AWS's growth accelerates-potentially hitting 27% year-over-year in Q4 2025-the intrinsic value could rise closer to $305.

Conclusion: A Tug-of-War Between Growth and Cost

Amazon's valuation is a tug-of-war between its high-growth AWS segment and the capital-intensive nature of its business. While AWS's 20–22% CAGR through 2030 and strong OCF provide a solid foundation, the company's heavy capex and varying WACC estimates introduce uncertainty. DCF models that assume a 3% terminal growth rate and 10% discount rate suggest the stock is overvalued by 23%, but those with more optimistic assumptions could justify the current price.

For investors, the key takeaway is that Amazon's valuation hinges on the sustainability of its growth. If AWS continues to outperform and OCF margins hold steady, the stock may warrant a premium. However, if capex outpaces cash flow generation or AWS's growth slows, the market price could face downward pressure. In a world where AI and cloud computing are reshaping industries, Amazon's future remains both promising and precarious.