Amazon (NASDAQ:AMZN | AMZN Price Prediction) didn’t have the best 2025. Barring an end-of-year miracle, AMZN stock has underperformed the S&P 500 and has even trailed some corporate bonds with a low 4% return. It’s been a disappointing year for long-term investors, but Amazon has a long history of producing tremendous returns. Lackluster returns in 2025 may have set the stage for a big rally in 2026.
Amazon Is An AI Stock Now
Amazon’s online marketplace simplified commerce, allowing people to purchase almost anything with a single click. However, the tech giant has made several strategic acquisitions to tap into more industries. Amazon Web Services was one of the company’s best ideas due to its high margins, steady growth, and perfect positioning for the AI boom.
The AWS cloud platform is the digital bedrock of many businesses, and its AI features make it an even bigger draw. Businesses can create AI agents in AWS that enhance the customer experience. Companies that don’t want to use Amazon to create AI agents can still use Amazon’s AI agents to boost productivity. Those same AI agents also save Amazon a lot of money since they handle some of the tasks that would be assigned to customer support and developers.
Amazon even offers Trainum2 AI chips, which generate billions of dollars each year. Anthropic recently received nearly 500,000 Trainium2 chips for its Claude AI models and gave Amazon a stake in its company in return.
Advertising Revenue Continues To Boost Margins
One of the weaknesses of online marketplaces and retail locations is their low profit margins. Retail giants Walmart (NYSE:WMT) and Costco (NASDAQ:COST) regularly deliver net profit margins of roughly 3%. Amazon would be on the same boat if it didn’t diversify beyond its online marketplace.
Cloud computing plays a role in higher margins, but Amazon has quietly become an advertising giant. Amazon’s ad revenue rose by 24% year-over-year to reach $17.7 billion in Q3. Online ad revenue now makes up almost 10% of the company’s total sales, but its higher profit margins bring up the company’s net earnings.
Amazon’s ad placements across its online marketplace are part of the reason the tech giant posts double-digit net profit margins. Without ads and cloud computing, Amazon wouldn’t generate as much profits and would have margins that more closely resemble Walmart and Costco. As margins continue to expand, Amazon’s stock should rally.
Amazon’s Valuation Looks Attractive
Although Amazon stock has been sluggish this year, its revenue and earnings have continued to grow. The company regularly delivers double-digit revenue growth rates while expanding profit margins. Its financial growth has outpaced its recent stock gains, which makes 2026 look like a promising year for investors.
The stock also trades at a relatively low 32.8 P/E ratio. AMZN shares had a P/E ratio that ranged from 40 to 50 in 2024. A return to those levels amid AI tailwinds can lift the stock considerably, especially if Amazon continues to boost its profit margins.
Underperforming Magnificent Seven stocks don’t often remain laggards for long. Amazon’s slow 2025 may be a stepping stone to a meaningful rally in 2026.
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