Amazon.com Inc. is facing investor concerns over its renewed focus on heavy spending, particularly in artificial intelligence (AI), which is seen as impacting profitability. This shift has caused Amazon’s stock to underperform compared to its megacap technology peers, following its earnings report in early August where the company indicated a pivot back to investment after a period of cost-cutting that significantly boosted profits.
The decision to prioritize AI spending has raised concerns among investors that increased capital expenditures might squeeze cash flows, according to James Abate, Chief Investment Officer at Centre Asset Management LLC. Abate notes that Amazon shares historically perform better when the company emphasizes profitability improvements rather than ramping up investments.
This shift in strategy has led to a pause in Amazon’s stock outperformance, with shares now more than 3% below their pre-earnings level, while the broader Bloomberg Magnificent Seven Index has gained approximately 4% during the same period. The stock’s decline continued slightly in early trading on Tuesday. Investors are particularly worried that increased spending could erode the profit margins that were a significant driver of Amazon’s 30% rally leading up to a peak in early July.
Benchmark analyst Daniel Kurnos also highlights potential risks to Amazon’s positive momentum. He suggests that the timing of these increased expenditures could pressure margins in the upcoming quarters, shifting focus back to the company’s top line at a time when macroeconomic conditions appear uncertain.
Amazon’s unique business mix—including retail, video streaming, and its AWS cloud services—exposes it to various economic pressures differently than other tech giants. While AWS remains strong, concerns over a potentially weaker U.S. consumer could impact Amazon’s retail segment. David Wagner, a portfolio manager at Aptus Capital Advisors LLC, observes that investors seem hesitant, waiting for more clarity on consumer behavior, which may explain why Amazon’s stock has lagged behind its peers.
Another factor weighing on investor sentiment is Amazon’s approach to its growing cash reserves. Unlike other megacap tech firms, Amazon does not pay a dividend and has been relatively conservative with share buybacks. While its peers have authorized substantial buyback programs, Amazon’s $10 billion buyback plan, approved in 2022, was less than half utilized by the end of June, with no repurchases in the last quarter.
Morgan Stanley analysts, led by Brian Nowak, point out that Amazon’s reluctance to return capital to shareholders could become more pronounced as competitors like Meta, Alphabet, and Booking Holdings have added dividends alongside their buyback strategies. Without a more impactful capital return policy, Amazon risks falling behind in the competition for investor capital. By the end of 2025, if current trends continue, Amazon’s net cash balance could account for approximately 8% of its total market cap, ranking it second-highest among the top 25 S&P 500 companies by market value, according to Nowak.
Despite these challenges, there are signs that investors are starting to re-enter positions in Amazon, as well as other major tech stocks like Nvidia, Microsoft, and Apple, with Amazon’s stock rising about 11% from its most recent low on August 5.
Amazon’s current valuation stands at approximately 28 times forward earnings, offering a discount compared to most of the “Magnificent Seven” tech giants, with only Alphabet trading at a lower multiple. It also trades at a slight premium to the Nasdaq 100 index, which has a forward earnings multiple of around 26.
James Abate comments on this trend, noting that investors are conditioned to buy dips in major tech stocks, including Amazon. “People have muscle memory and the winning trade for most people has been to use any dip in the Magnificent Seven as a buying opportunity,” he says, suggesting that this strategy will likely persist until it stops delivering returns.
Analysis and Market Impact
Amazon’s strategic decision to ramp up spending on AI and other initiatives represents a significant opportunity to position itself at the forefront of technological innovation. However, this comes at the cost of short-term profitability, which has caused some investor hesitation. The potential for long-term growth remains strong, particularly if Amazon successfully leverages its AI investments to enhance its product offerings and operational efficiency.
On the other hand, the market’s reaction highlights the delicate balance between investing for future growth and maintaining current profit margins. Investors with a focus on near-term returns might view Amazon’s current strategy as a risk, especially given the company’s cautious approach to capital returns. However, for long-term investors, the recent dip in Amazon’s stock could present a buying opportunity, especially if the company’s investments pay off as expected.
