Key Points
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Amazon’s advertising business is its fastest-growing segment.
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AWS is gaining traction in the AI space.
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Amazon’s gross margins have improved dramatically over the past five years.
- 10 stocks we like better than Amazon ›
Amazon (NASDAQ: AMZN) has underperformed most of its big tech peers throughout 2025, but that underperformance may be the very thing that makes it a great stock pick. With Amazon not seeing its stock rise by a massive amount, it could be primed for a rally heading into 2026, and its third quarter results may have kicked off that rally.
I’ve got three reasons why Amazon is a fantastic stock pick right now, and I think investors would be wise to scoop up shares while it’s still relatively cheap.
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Image source: Amazon.
1. Amazon’s ad business is driving a new wave of growth
While most people think of Amazon as an e-commerce powerhouse (and it is), it has other segments that are driving most of the growth investors are excited about. One area that emerged in recent years is Amazon’s ad segment. Because consumers come straight to Amazon’s website to shop for goods, it is sitting on a goldmine of advertising data. Amazon has taken this gold mine and transformed itself into an advertising powerhouse.
During Q3, Amazon’s advertising segment grew revenue at an impressive 24% year over year pace to $17.7 billion. For reference, Netflix generated $11.6 billion during Q3. Amazon’s ad business is massive and growing, which is a great sign for investors.
As this segment continues to grow, it will also improve Amazon’s margins, because advertising businesses are known to have far superior margin profiles than commerce businesses. As long as the advertising service maintains its strong growth rate, I’ll continue to be bullish on Amazon
2. AWS continues to be a powerhouse
Amazon Web Services (AWS) is Amazon’s cloud computing division. AWS was the first in this space and holds the largest market share. While it has lagged behind Azure and Google Cloud in growth rate, Q3 was a step in the right direction.
AWS grew its revenue 20% year over year, an improvement from Q2’s 17% growth. This showcases that Amazon is benefiting from the artificial intelligence trend as customers scramble to get AI workloads up and running on cloud infrastructure.
This trend isn’t fleeting either; Amazon plans to spend a ton of money to build out its AI computing infrastructure. One area that saw massive growth is its Trainium2 custom AI chip, a multi-billion dollar business which grew 150% quarter over quarter. That’s not a typo. Amazon more than doubled the revenue in this existing segment in just a three-month time frame.
AWS is a powerhouse, and like its advertising service segment, has much better margins than its commerce divisions. All of this adds up to improving margins, which will boost Amazon’s stock over the long term.
3. Gross margins are improving
Amazon’s margins aren’t like that of a normal company. Amazon has a fairly large investment portfolio that messes with net income figures, which skews its profit margin metric. Furthermore, it’s spending a ton of money on building out AI computing infrastructure, which affects both operating margin and profit margins. As a result, I think investors should focus on gross margin to get a better idea of how Amazon’s margins are trending.
Ultimately, a higher gross margin gives Amazon the ability to produce greater profits when fully maximized for profits. This is why software companies trade for higher premiums than a commerce business, because their high gross margins give them the ability to produce impressive profit margins.
AMZN Gross Profit Margin (Quarterly) data by YCharts
Amazon’s gross profit margin has steadily ticked up thanks to the rise of high-margin businesses like AWS and advertising. This bodes well for the future, and it makes me happy to be a long-term shareholder.
Although Amazon’s stock saw a bump after reporting stellar Q3 results, I think it’s an excellent buy today as it has lagged its peers in recent months. Additionally, once Amazon is fully optimized for profits, it could become one of the biggest cash flow-generating companies on earth, although that’s down the road a ways.
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Keithen Drury has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.