Is Amazon undervalued? The "three horses" of cloud, self-developed chips, and robotics are opening up new growth spaces

The Zhitong Finance APP notes that as an undoubtedly outstanding company, Amazon (AMZN.US) currently appears to be undervalued by the market—over the past year, the company's stock performance has lagged behind the S&P 500 index. According to analyst Jetstream Research, the current valuation level presents a good entry opportunity for long-term investors.

The analyst believes that Amazon's growth narrative is a combination of strong revenue growth and expanding operating cash flow profit margins. In particular, AWS and advertising—Amazon's two fastest-growing segments—are significantly driving the company's overall revenue growth. More importantly, the profit margins of these two businesses are much higher than those of its core e-commerce operations, and as these businesses continue to expand, the operating cash flow profit margins will also rise. Additionally, Amazon's investments in self-developed chips and robotics technology will boost profit margins in the long term and are expected to enable the company's operating cash flow growth rate to exceed revenue growth.

Meanwhile, Amazon's stock price is currently at a historically low price/operating cash flow ratio, providing long-term investors with a rare opportunity to buy into one of the world's largest and highest-quality companies at a discount. Based on this, the analyst has given Amazon a "strong buy" rating.

Amazon's Revenue Composition and Operating Profit Margins

Jetstream Research points out that Amazon divides its massive revenue into three categories: North America, International, and AWS cloud services. Over the past twelve months, the company achieved revenue of $743 billion (a year-on-year increase of 14%), with 59% coming from North America, 23% from International, and 18% from AWS.

Although AWS accounts for only 18% of revenue, it contributes about 56% of operating profit; this is because AWS's operating profit margin is far higher than that of North America (approximately 7%) and International (approximately 3%) segments.

Over time, the growth of AWS has increased Amazon's overall operating profit margin from less than 5% a decade ago to over 11% today. The analyst expects that as AWS continues to grow, Amazon's operating profit margin will further expand in the future.

Amazon has also further segmented its sales into seven categories, clearly showcasing the contribution of each business to overall growth. Advertising and AWS are the fastest-growing segments, with year-on-year growth rates far exceeding 20%. Even the largest segment—online stores and third-party seller services—maintains a very healthy low double-digit year-on-year growth

It is reassuring that Amazon's fastest-growing segment is also its most profitable segment. Therefore, as advertising and AWS continue to outperform other segments, they will gradually raise Amazon's overall operating profit margin. In light of this, investors should closely monitor the growth rates of these two segments, as they contribute the most to Amazon's overall profitability.

Self-developed chips boost AWS accelerated growth

Like other hyperscale cloud service providers, Amazon has been developing self-developed chips to reduce its reliance on NVIDIA (NVDA.US). This provides AWS customers with more cost-effective computing resources and has driven the acceleration of revenue growth in this segment over the past few quarters.

CEO Andy Jassy described this during the Q1 2026 earnings call, commenting on the cost-effectiveness of its self-developed chips:

“Our Trainium2 chip is about 30% more cost-effective than comparable GPUs and is currently nearly sold out. The Trainium3 chip just started shipping in 2026, and its cost-effectiveness is 30% to 40% higher than Trainium2, and it is almost fully booked; the Trainium4, which is about 18 months away from widespread launch, has also had a significant portion pre-ordered.”

This exceptional cost-effectiveness is driving high demand for Amazon's self-developed chips. Jassy elaborated on the revenue growth from the chip business:

“We achieved nearly 40% quarter-over-quarter growth in Q1, with an annualized revenue run rate now exceeding $20 billion, and a year-over-year growth rate in the triple-digit percentage range, although this somewhat obscures the true scale of the business.”

“If our chip business were an independent company and sold the chips produced this year to AWS and third parties like other leading chip companies, our annualized revenue run rate would reach $50 billion. Based on our assessment, our self-developed chip business has now become one of the top three data center chip businesses globally.”

From a broader perspective, AWS's total annualized revenue run rate is $150 billion, so this $20 billion chip revenue run rate (with a year-over-year growth of “triple-digit percentage”) accounts for about 13% of the total, which is no small number. Self-developed chips are rapidly becoming an important component of AWS's overall revenue and are significantly driving the acceleration of revenue growth in this segment.

Jassy is also considering selling self-developed chips directly to other companies, rather than exclusively leasing them through AWS. As he mentioned during the earnings call, this would bring the company's chip business annualized revenue run rate to $50 billion (and still growing rapidly). Therefore, if Amazon decides to pursue this direction, it will be another revenue opportunity for the company Self-developed chips not only save costs for AWS customers but also reduce costs and increase efficiency for Amazon itself. Through the independent design of chips, Adam Selipsky expects that as more self-developed chips are deployed in its data centers, the company will save a significant amount in capital expenditures and operating expenses:

"Once we reach a certain scale, we expect Trainium to save us billions of dollars in capital expenditures annually and provide hundreds of basis points of operating margin advantage in inference compared to relying on other chips."

This is undoubtedly a positive signal for the market's general concerns about AI infrastructure costs. Jetstream Research believes that investors should continue to track AWS's operating margin to verify whether self-developed chips have indeed brought about the operational cost savings described by Selipsky. Over the past five years, AWS's operating margin has expanded from 29% in 2021 to 35% today, showing a continuous improvement.

However, this margin peaked at 37% in 2025, indicating a 2% decline over the past year. "Some degree of fluctuation is expected, but ideally, this metric should trend upward in the long term. Therefore, investors should closely monitor this metric going forward," Jetstream Research stated.

AI and Robotics Benefit Other Business Segments of Amazon

Amazon's investment in AI not only benefits AWS but also has a positive impact on other business segments. The advertising sector is a prime example—its revenue growth rate has increased from the high double digits year-on-year a year ago to the low twenties.

AI has also enabled Amazon to provide more accurate product recommendations to customers, thereby boosting e-commerce sales growth. Data released by Amazon shows that customers using its AI assistant "Rufus" (recently renamed "Alexa for Shopping") have a purchase conversion rate over 60% higher than those using traditional search. The ability to make precise recommendations to specific customers from over 300 million products on its platform is a significant competitive advantage for Amazon and is driving its online store's revenue growth from mid-single digits to low double digits.

Some of Amazon's most valuable AI applications are not consumer-facing. The company routinely uses AI to optimize internal operational efficiency, such as predicting consumer demand for different products to achieve proactive inventory optimization or planning more efficient delivery routes to shorten delivery times. These ultimately enable Amazon to deliver more goods at lower costs and higher efficiency, creating a strong competitive barrier under its scale Amazon has also made significant investments in robotics technology, further enhancing the company's efficiency. Amazon has developed its own robots and deployed over 1 million robots across its entire operational network. For reference, Amazon currently has about 1.6 million employees, and in the future, the number of robotic employees may even surpass that of humans. These robots handle sorting inventory, packaging, and other repetitive tasks in fulfillment centers.

Additionally, Amazon utilizes its AWS infrastructure to store and process the vast amounts of data collected by these robots' cameras and sensors. Therefore, the company's investment in self-developed chips not only improves cost efficiency for AWS customers but also reduces Amazon's own internal operating expenses, providing room for further expansion of its future profit margins.

It is evident that AI has a significant benefit across all business segments of Amazon. Whether providing more cost-effective computing power for AWS customers, delivering more precise advertising and product recommendations, or optimizing internal operational processes, Amazon's investment in AI infrastructure is driving revenue growth and expanding operating profit margins.

Healthy Balance Sheet, Manageable Long-term Debt

Amazon's aggressive investment in AI infrastructure has nearly compressed its free cash flow to zero. Although operating cash flow grew by 30% year-over-year in the most recent quarter (outpacing revenue growth), free cash flow declined by about 95% year-over-year due to large capital expenditures.

To raise investment funds, Amazon has engaged in debt financing: as of the most recent quarter, it has $119 billion in long-term debt on its balance sheet.

Jetstream Research indicates that this figure may seem large at first glance, but considering Amazon's scale, it remains manageable. Relative to its $442 billion in shareholder equity, Amazon's long-term debt-to-equity ratio is only 0.27. In terms of short-term debt repayment capability, its current assets are $255 billion, current liabilities are $217 billion, resulting in a current ratio of 1.17. Therefore, overall, Amazon is in a good position to meet both short-term liabilities and fulfill long-term debt obligations.

It is also worth noting that from the perspective of operating cash flow, Amazon's profitability is strengthening. As mentioned, Amazon's operating cash flow has increased by 30% year-over-year to $149 billion over the past twelve months, outpacing the 14% revenue growth during the same period. Given its already large base, such growth is quite impressive. Therefore, Amazon's financial situation in fulfilling debt obligations and supporting growth is likely to become even more robust in the future Revenue and Operating Cash Flow Forecast (2026-2031)

As mentioned earlier, multiple revenue segments of Amazon are showing an accelerating revenue growth trend; however, to be conservative, Jetstream Research has modeled a certain deceleration in revenue growth for the coming years. Advertising and AWS are expected to remain the fastest-growing segments (with growth rates between nearly 20% to slightly over 20%), while other segments will see mid-to-high single-digit growth (excluding the physical store segment, which has historically grown in the mid-single digits). The forecast for each segment over the next five years and the total results are as follows:

As for operating cash flow, Amazon has steadily improved its operating cash flow margin over the past decade:

Fiscal Year 2016: $17 billion operating cash flow / $136 billion revenue = 13% operating cash flow margin

2026 (last twelve months): $149 billion operating cash flow / $743 billion revenue = 20% operating cash flow margin

In other words, Amazon has increased its operating cash flow margin by about 7 percentage points over the past decade. If Amazon can continue to expand its margin at a similar rate over the next five years, its operating cash flow margin could reasonably reach 24% by 2031. Combining the above revenue estimates, we arrive at the following result:

$12.73 trillion revenue × 0.24 = $306 billion operating cash flow

Finally, if we use a 20 times price/operating cash flow multiple (below its 10-year median of 25 times), and calculate based on 11.31 billion shares outstanding (assuming about 1% dilution per year), we can derive the following valuation for 2031:

$306 billion operating cash flow × 20 times = $6.12 trillion market value

$6.12 trillion market value / 11.31 billion shares = $541 per share

From the current share price of about $250, this result would provide investors with an approximate 17% annual compound growth rate (CAGR) from now until 2031. This is still based on relatively conservative revenue and operating cash flow forecasts.

If Amazon's growth is slightly faster than the above predictions and reaches $541 per share by 2030 (rather than 2031), investors would achieve about a 21% annual compound growth rate during this period. "Therefore, Amazon's stock is very likely to achieve an annualized return of nearly 20% to slightly over 20% in the next four to five years," Jetstream Research stated.

Risk Warning: Revenue Concentration of Anthropic and OpenAI

Despite being optimistic about Amazon's prospects, Jetstream Research still cautions that a key risk for investors to watch is that AWS's growth is becoming increasingly tied to just two companies: Anthropic and OpenAI. These two companies are consuming a significant amount of cash, which means their ability to fulfill spending commitments is far from guaranteed This raises a question: What would the growth of AWS look like with and without Anthropic and OpenAI?

Jetstream Research made the following analysis based on backlog orders: As of the first quarter of 2026, AWS's backlog orders amounted to $364 billion, a year-on-year increase of 93%. In addition, AWS has a spending commitment of $100 billion from Anthropic, which CEO Andy Jassy clearly stated is not included in the current $364 billion backlog. This means that combined, AWS has locked in approximately $464 billion in spending commitments.

However, Jassy did not specify how much of the $364 billion backlog comes from OpenAI. It is understood that OpenAI's total spending commitment to AWS is $138 billion; if we assume this portion is included in AWS's $364 billion backlog, then approximately 38% of the current backlog comes from OpenAI alone.

If we also include Anthropic (bringing AWS's total backlog to $464 billion), we can conclude that slightly more than half of AWS's total backlog may come from these two companies, Anthropic and OpenAI.

At this time last year, AWS's backlog was $189 billion; excluding Anthropic and OpenAI, Jetstream Research estimates that AWS's current backlog may be $226 billion, a year-on-year increase of 20%. Although this is far from the explosive growth of 93% when including OpenAI, it is still a healthy growth rate for such a large business. This indicates that AWS's highly diversified customer base is continuing to expand its spending.

The analyst also assessed this risk by examining AWS's revenue growth over the past year and the previous year (before the surge in spending commitments from Anthropic and OpenAI). As shown in the chart below, AWS's revenue growth rate for 2024 and 2025 is around 20%, while the growth rate has accelerated to over 20% in the past three quarters:

"Although Amazon has not detailed how much of AWS's current revenue comes from Anthropic and OpenAI versus other customers; however, Jassy has stated that 'AWS's AI revenue run rate has exceeded $15 billion'—which is approximately 10% of AWS's total revenue run rate of $150 billion, and this $15 billion is likely primarily from Anthropic and OpenAI, so it is reasonable to assume that these two companies together account for about 10% of AWS's current total revenue." "As the spending growth of these two companies outpaces the diversified customer base of AWS, this proportion is expected to gradually increase," Jetstream Research stated.

In the most recent quarter, AWS achieved revenue of $38 billion, a year-on-year increase of 28%. If 10% of that quarter's revenue came from Anthropic and OpenAI, then approximately $4 billion came from these two companies. This allows for an estimation of AWS's growth excluding these two companies, as follows:

Q1 2025: $29 billion (year-on-year growth of 17%)

Q1 2026 (excluding Anthropic and OpenAI): $34 billion (year-on-year growth of 17%)

Q1 2026 (including Anthropic and OpenAI): $38 billion (year-on-year growth of 28%)

"This shows that AWS's revenue growth from a highly diversified customer base remains at nearly 20%, while the new revenue from Anthropic and OpenAI further boosts this growth rate to just below 30%. Therefore, even with such a large-scale business, AWS's highly diversified customer base still brings very healthy revenue growth."

Jetstream Research pointed out that a key consideration for the future is that as Anthropic and OpenAI increase their spending, their share of AWS revenue will become increasingly significant. These two companies already account for half of AWS's total backlog, so their share of AWS's total revenue could easily expand to 30% to 40% or even higher within the next three to five years.

This has profound implications for Amazon's overall business, as nearly 60% of the company's operating profit comes from AWS. If 30% to 40% of that 60% comes solely from Anthropic and OpenAI, then these two companies could ultimately contribute about 20% to 25% of Amazon's total operating profit—this would represent a significant customer concentration risk.

"Of course, there is no guarantee that either of these companies will be able to fulfill these spending commitments. Both companies are currently cash flow negative: Anthropic is expected to achieve profitability by 2028, while OpenAI is not expected to break even until 2030. If either company decides to reduce its spending targets, AWS's revenue growth will slow accordingly," Jetstream Research noted.

Therefore, investors should continue to monitor this situation, particularly paying attention to the scale of AWS's backlog, the concept of 'AWS's AI revenue run rate' (which can serve as a proxy indicator for the contributions of Anthropic and OpenAI), and news regarding the profitability (or losses) of Anthropic and OpenAI. If the share of Anthropic and OpenAI in AWS's total revenue exceeds 40% but they still have not achieved profitability, this will be a warning sign. At that point, any issues with either company could pose headwinds to AWS's revenue growth, thereby dragging down Amazon's overall operating cash flow growth