Predicting the performance of a particular stock is challenging, but historically it has been easier with Amazon (AMZN 0.69%) stock. Years ago, a pattern emerged that showed a strong correlation between Amazon’s price per share and its operating profit.

It may seem like calculating a company’s profit is a straightforward process. In reality, there are multiple ways of looking at it. There are widely used accounting methods that take everything into account. However, some companies make long-term strategic moves that reduce accounting profits at the moment. Taking these things into account can paint a more accurate picture of the company. This is why multiple profit metrics are relevant to investors.

At Amazon, the operating profit metric considers what the company earns before factoring in other factors like interest expenses and taxes. Over the past decade, Amazon shares have mostly risen when operating profit rose, and vice versa, as the chart below shows.

AMZN data from YCharts

Over the past few weeks, Amazon stock has fallen about 20%, and I’m sure investors want to know what will happen next. Well, I’d say the next big move in Amazon stock can be predicted by predicting the next big move in operating earnings. And here’s what we can know about it now.

Where do the profits go?

In the first half of 2024, Amazon generated operating income of nearly $30 billion. That’s an incredible 141% increase over the same period in 2023. And it’s worth noting that operating income for the last 12 months is at an all-time high.

As has long been the case, most of Amazon’s operating profit comes from Amazon Web Services (AWS). In the second quarter of 2024, AWS generated operating profit of $10.5 billion, which accounted for 84% of the company’s total operating profit in the second quarter. Therefore, it stands to reason that if an investor can predict what will happen to Amazon’s AWS, they can also predict what will happen to its total operating profit.

With that in mind, I’d like to start by looking at revenue potential. Amazon’s AWS is one of the world’s leading cloud computing platforms. Research by Mordor Intelligence, MarketsandMarkets, Grand View Research and Fortune Business Insights forecasts average annual growth of between 15% and 21% for the industry through 2028 and beyond.

It’s not about which research institute is exactly right. It’s more about the fact that virtually all experts expect double-digit industry growth for a long time, which is a huge growth spurt for Amazon’s AWS.

However, when you look more closely at the details of Amazon’s report, it becomes clear that AWS’ growth may be slowing down. This isn’t usually stated in the press release. However, in the official quarterly filings, the company does disclose its remaining performance obligations, many of which are AWS-related. These are essentially future revenues under a contract. Strong growth from one quarter to the next can be a sign of AWS revenue growth in the near future.

At the end of the second quarter, Amazon had commitments of $157 billion, compared to $158 billion in the first quarter. For comparison, that’s a $1 billion decline compared to a $10 billion increase in the same period last year. That’s not a foolproof indicator, but it could be a sign of slowing growth for AWS in the near future, even though it has strong industry tailwinds.

In terms of profitability, Amazon management expects AWS spending to increase in the second half of 2024 compared to the first half, particularly due to ongoing investments in artificial intelligence (AI). AI applications require specialized hardware that the company has been purchasing in recent quarters, and these costs are still rising.

These investments could impact Amazon’s AWS profitability in the coming quarters. Considering all of these factors together, it is possible that Amazon’s operating profit will be flat for the time being.

What this means for Amazon shares

Assuming that Amazon’s AWS growth slows and AI-related spending increases, I think it’s safe to expect the company’s operating profit growth to stall. It’s important for investors to keep things in perspective – operating profit is at an all-time high, and at nearly $55 billion annually, that’s an incredible amount. But if growth slows, I’d expect that to impact Amazon stock.

I expect Amazon stock to largely stay where it is now over the course of the next year. Consider that it’s still up about 15% over the last year, even after its 20% drop from its highs. That’s still a healthy gain that shareholders should be happy with.

I wouldn’t expect Amazon stock to make big gains any time soon. However, it’s important to remember that the long-term outlook for cloud computing is still pretty good, so I would expect AWS to pick up steam over the next few years and Amazon stock to reach new highs. It might just be a test of patience for shareholders.