Revisiting Our Amazon Thesis After Jassy's Capital Allocation Pivot

When we wrote about Amazon in early April, we focused on the operating margin trajectory: from 2.4% in 2022 to 6.4% in 2024, with a path toward double digits. That path has now been walked. FY2025 operating margins came in at 10.5%, shattering even the most optimistic sell-side estimates.

Three things drove the acceleration. First, AWS margins expanded as AI workload mix shifted toward higher-value inference. Second, the North American retail segment reached sustained profitability after years of investment. Third — and this is the one most analysts missed — advertising revenue grew 24% year-over-year to an estimated $69 billion, at margins north of 60%.

Jassy's letter contained a subtle but significant reframing. Previous letters emphasised investment, customer obsession, and long-term thinking — code for "we will spend aggressively and margins will be what they are." This letter explicitly referenced return on invested capital, capital efficiency, and shareholder value creation. Those are not Bezos-era words.

Amazon spent $83 billion in capex during FY2025, predominantly on AWS infrastructure and logistics. The question investors have been asking for two decades — when does the spending moderate? — may finally have an answer. Jassy signalled that the 2026-2027 capex cycle will prioritise AI infrastructure at the expense of new fulfilment centres, which are largely built out in North America. That mix shift is margin-positive.

Management repurchased $12.4 billion in shares during FY2025, the largest buyback in company history. At an average price roughly 15% below where the stock traded post-letter, that represents competent capital deployment.

Amazon trades at 25.8x forward earnings following the post-letter rally. Against a five-year average of 55x, that still looks cheap. Against mega-cap tech peers — Microsoft at 31x, Alphabet at 18x — it looks reasonable.

The bull case doesn't require heroic assumptions. AWS at $100 billion in revenue by FY2027 (growing 18-20% annually), advertising at $85-90 billion (growing 20%+), and North American retail at breakeven-to-modest-profit gets you to $120-130 billion in operating income. At 25x, that supports a $3 trillion market cap. Amazon sits at $2.375 trillion today.

All 19 Buy-rated analysts have targets above $280. Not a single Sell rating. The consensus target of $281 implies modest upside, but that consensus will move higher after the letter is fully digested.