Amazon Just Hit a Major Milestone That You Don't Want to Ignore

Amazon (NASDAQ: AMZN) surprised investors last week with its underwhelming first-quarter guidance. The stock fell, but it's already on the rebound as smart investors see beyond somewhat disappointing quarterly guidance. After all, there was a lot to love about the quarter, and even more to love about how Amazon is leveraging its dominant position in cloud computing to boost its artificial intelligence (AI) business.

Between all the talk about AI and guidance, there was an important milestone Amazon reached that got overshadowed. But it bodes well for Amazon's future.

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It all boils down to profits

By most accounts, Amazon had a stellar fourth quarter. Revenue increased 10% year over year, coming in at the high end of guidance, which was 7% to 11%. CEO Andy Jassy said that it would have reached 11% without foreign exchange impacts, which negatively affected Amazon due to the strong dollar.

Revenue growth was solid, but operating income growth was spectacular. It increased 61% over last year to $21.2 billion, exceeding expectations of $16 billion to $20 billion, up from $13.2 billion last year. As usual, Amazon Web Services (AWS) provided an outsize portion of operating income -- exactly half. However, it was a much lower percentage than in previous quarters.

Data source: Amazon's quarterly reports.

AWS operating income increased 47% year over year in the fourth quarter, lower than the whole. Amazon is investing more in AWS' generative AI program, which could be pulling down AWS' profits. It spent about $75 billion on capital expenditures (capex) in 2024, a large increase from $48 billion in 2023.

It could also mean some of the other businesses are pulling more of their own weight. Amazon has been restructuring many areas of the e-commerce business to become more efficient, and it looks like it's paying off. The "last mile" is usually the most expensive part of the process, and now that Amazon has switched to a regional distribution system, it's a lot cheaper to get products to customers who are now closer. It also uses more robotics in the process, making up some of the cost of human labor.

Some of its service-based businesses, which are higher-margin, are also growing quickly. It's seeing a positive reaction to its ad-supported streaming tier, and advertising segment sales increased 18% year over year.

With the high increase in operating income, Amazon hit a new milestone in the fourth quarter with its highest-ever quarterly and annual operating margins.

AMZN Operating Margin (Annual) data by YCharts

Amazon considers operating income its baseline profitability metric, but it also reported its highest-ever annual profit margin at 9.3%. These margins mean that Amazon is at peak profitability, historically speaking.

It isn't likely to last... for now

One of the talking points experts have been discussing after the fourth-quarter report is management's investment in the AI business. Jassy said that the fourth-quarter figure of $26.3 billion in capex, most of which is going to AI, was a good frame of reference for what it expects as an annual run rate in 2025. That would be a total of more than $105 billion.

While that could appear drastic, Amazon sees it as crucial and necessary. Jassy has repeatedly said that the AI opportunity is massive and nearly unprecedented, and Amazon's visionary businesses and capabilities to bring it to fruition is how it has become the dominant player in e-commerce and cloud computing.

Jassy explained that generative AI is going to become a standard element of application development, like storage and databases. As the leader in cloud computing, Amazon can benefit by investing early and gaining an edge in this space.

The downside of this is that the capex is likely to impact Amazon's earnings negatively over the short term. After the phenomenal profitability it reported in the fourth quarter, management is guiding for a major slowdown in the 2025 first quarter. It's guiding for operating income in the range of $14 billion to $18 billion, compared to $15.3 billion in the year-ago period.

It will get there again

Amazon isn't likely to keep this peak profitability in the near term, but it's likely to get there again at some point. It continues to refine its fulfillment process, and it's making strides in the higher-margin businesses. AWS is a high-margin business, and with the new, lower-cost developments like DeepSeek and Amazon's own new large language model, Nova, AI is likely to become a lot cheaper to run as the tech advances.

There are many reasons to be excited about Amazon and its potential today, and its progress in profitability is one of them.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.