Amazon.com (AMZN.US) has experienced a challenging start to the year, but some Wall Street observers believe this pullback presents a potential buying opportunity for investors confident in the long-term returns from artificial intelligence (AI). Despite a recent rebound this week, Amazon's stock has declined 9.2% over the past 12 months, significantly underperforming the Nasdaq Composite Index, which has gained approximately 13% over the same period. Since its earnings report on February 5, the stock has fallen another 7.5%, influenced by profits that fell short of expectations and market concerns over its substantial AI capital expenditure plans.
Investors are broadly worried that tech giants, including Amazon, are committing hundreds of billions of dollars to build AI infrastructure without yet seeing commensurate returns. The company anticipates its capital expenditures will rise to around $200 billion in 2026, a significant increase from the $131.8 billion projected for 2025. Concurrently, Amazon's fourth-quarter earnings per share of $1.95 slightly missed Wall Street forecasts, further fueling market caution.
However, this anxiety over AI spending has led to a notable contraction in Amazon's valuation. The stock currently trades at a forward 12-month price-to-earnings ratio of about 25.8 times, substantially below its five-year average of 48.1 times. Brian Nowak, a Morgan Stanley analyst and the firm's head of technology research, highlighted in a report on Wednesday that Amazon already possesses a powerful business segment poised to benefit directly from expanding capital expenditures: Amazon Web Services (AWS). Nowak described AWS as a "generative AI winner underappreciated by the market," emphasizing that demand for cloud services continues to be a major growth driver.
Management disclosed during the February 5 earnings call that the company's backlog of performance obligations reached $244 billion, a 40% year-over-year increase. Nowak also noted that, similar to other cloud providers, Amazon currently faces capacity constraints. Continuously expanding data centers to meet growing demand is expected to further drive business growth, though it necessitates significant capital investment. "That is precisely why we remain bullish on the acceleration of AWS capital expenditures," Nowak wrote. He maintains an "Overweight" rating on Amazon with a $300 price target, implying over 45% upside from current levels.
Overall, Wall Street sentiment toward Amazon remains optimistic. According to FactSet, 66 out of 72 analysts covering the stock recommend a "Buy" rating, with only six suggesting "Hold." Nevertheless, AI investments are altering market perceptions of tech giants' cash flow capabilities. Amazon reported in February that its trailing twelve-month free cash flow as of the fourth quarter was $11.2 billion, markedly lower than the $38.2 billion reported a year earlier.
Jeff Buchbinder, Chief Equity Strategist at LPL Financial, noted in a February 12 report that as AI capital spending becomes a long-term theme, investors will increasingly focus on company guidance regarding free cash flow prospects. He added, however, that consensus expectations still point to "positive but volatile cash flow growth."
Recent trading activity suggests some investors may be regaining confidence in the e-commerce and cloud giant. Amazon's stock closed higher on Tuesday, ending a nine-session losing streak—its longest since July 2006. The stock climbed another 1.8% on Wednesday to close at $204.79. Notably, despite the rebound, a 13F filing disclosed Tuesday evening revealed that Warren Buffett's Berkshire Hathaway (BRK.A.US, BRK.B.US) reduced its stake in Amazon by approximately 80% to 2.3 million shares, though this news did not impede the stock's short-term recovery.