Amazon Stock Costs More Than the Market. I’d Still Buy It for the Next 5 Years.

Shares of Amazon (AMZN +0.07%) leaped about 5% on Monday. Still, the stock trades near $262 as I write, about 8% off its record close of $284.02 on Aug. 3.

For those buying today, though, the more helpful yardstick is an S&P 500 (^GSPC +0.28%) index fund. From 1928 through 2025, the index compounded at about 10% a year with dividends reinvested, according to historical data gathered by New York University professor Aswath Damodaran. Any one stock needs to beat that to be worth the added risk.

I think Amazon will beat it over the next five years, mostly because its profits are growing far faster than its sales.

Profits are growing faster than sales

Amazon’s net income isn’t a good gauge now. Its second-quarter net income of $62.6 billion included $53.4 billion in pre-tax non-operating income, mainly from its investments in Anthropic.

Operating income leaves gains like that out, giving a better look at the business itself. And the business looks impressive. Amazon’s operating income more than tripled from $22.9 billion in 2020 to $80 billion in 2025, compounding at around 28% a year.

It’s still climbing fast, hitting $93.7 billion in the 12 months through June, up 23% year over year.

This growth rate is accelerating, too. By the same measure, trailing-12-month operating income rose around 17% as of December and 19% as of March.

Trailing-12-month sales, in comparison, rose about 16% year over year. Put another way, every dollar of sales is turning into more profit than before.

Can earnings keep this up?

Driving much of the profit growth, Amazon Web Services (AWS) earned $54.7 billion in operating income over the trailing 12 months. That was around 58% of the company’s total, from a segment pulling in under a fifth of its sales.

And the cloud computing arm is still speeding up, as AWS revenue rose 37% from the year-ago quarter.

Advertising is another engine. Second-quarter ad sales reached $19.8 billion, a 26% rise over the year-ago period, after staying at around 22% growth (excluding foreign exchange) for four straight quarters.

Ads sold on Amazon’s own store pages are arguably among its most profitable sales, but the company doesn’t report their margins.

Amazon’s retail side is getting more profitable, too. Its North America segment had an operating margin of 7.4% for the trailing 12 months, up from 7% a year earlier. That might not seem like much. But on $454 billion in trailing sales, every extra percentage point of margin adds around $4.5 billion in yearly operating income.

Still, Amazon is paying a lot for this growth. Its net purchases of property and equipment climbed by $66.1 billion over the trailing 12 months, mainly for artificial intelligence (AI). Free cash flow for the same span was a $7.6 billion outflow. And depreciation on all these new data centers may drag down earnings for years to come. But most of this spending is going into AWS, the unit already posting the highest margin.

Management expects third-quarter operating income of $22.5 billion to $26.5 billion, versus $17.4 billion a year before. The company reports those results on Oct. 29.

I think Amazon can grow earnings around 15% yearly through 2031. Even that rate is about half what it did in the last five years — leaving room for AWS growth to slow.

Amazon doesn’t need a perfect five years

The stock isn’t cheap. At roughly $262, shares trade at about 25 times expected 2027 earnings, using analysts’ consensus estimate. The S&P 500 trades at about 19 times its expected earnings over the next 12 months, according to FactSet.

Even against a later year’s profits, then, investors pay a premium for Amazon.

But say the premium drops. If Amazon’s earnings rise 15% a year and its price-to-earnings ratio eases from about 25 to about 22 by late 2031, the stock would return about 12% a year. This would put shares near $460.

Simply matching the index’s long-run 10% would take earnings growth of only about 13% a year at that same lower price-to-earnings ratio.

In the end, I expect Amazon stock to beat the S&P 500 over the next five years, though likely by only a couple of percentage points a year. AWS growth might cool, and the AI spending may take longer to pay off than management hopes. But the stock doesn’t need everything to work out to beat the index’s long-run return.

Sure, every five-year forecast is partly guesswork. Even so, at today’s price, I’d rather hold Amazon than the index fund.