Earnings seasons can sometimes be rough. We're seeing it this time around with several AI stocks. Advanced Micro Devices' (AMD 1.48%) and Microsoft's (MSFT 1.05%) shares plunged after its recent quarterly update. Google parent Alphabet's (GOOG +0.37%) (GOOGL +0.27%) stock declined moderately despite reporting impressive results.
Amazon (AMZN 0.58%) has now joined the club. Shares of the e-commerce and cloud services giant fell roughly 6% on Friday following the company's fourth-quarter update Thursday evening. I have a prediction, though: Amazon's sell-off will set up a monster rebound in 2026.
NASDAQ: AMZN
Key Data Points
A classic market overreaction
Two factors caused Amazon's decline following its latest quarterly update. First, the company missed Wall Street's earnings estimate. Second investors didn't like that Amazon forecasts capital expenditures of $200 billion this year, a big jump from the 2025 capex of around $132 billion. However, I think Amazon's sell-off reflects a classic market overreaction.
Let's start with the earnings miss. To be sure, Amazon's reported earnings per share (EPS) of $1.95 in Q4 was slightly lower than the $1.97 expected by analysts. But it's important to put the company's earnings number in context. Amazon recorded special charges that reduced its operating income by $2.4 billion. By my calculations, these special charges lowered the company's EPS by around $0.22. Also, Amazon's reported revenue of $213.4 billion easily beat Wall Street's estimate of $211.3 billion.
I suspect the bigger issue was Amazon's projected capex for 2026. Analysts surveyed by FactSet were expecting capital expenditures in the ballpark of $147 billion. Is Amazon's massive spending increase worrisome? I don't think so.
Most of the capex will go to Amazon Web Services (AWS). However, Amazon CEO Andy Jassy had a good explanation for the increased investments on the Q4 earnings call, stating, "[W]e have very high demand. Customers really want AWS for core and AI workloads."
Investments aren't bad when they generate solid returns. Jassy said that Amazon is "monetizing capacity as fast as we can install it." He added, "We have deep experience understanding demand signals in the AWS business and then turning that capacity into strong return on invested capital. We are confident this will be the case here as well." I'm confident in Amazon's ability to deliver exceptional ROIC, too.
Amazon continues to fire on all cylinders
Importantly, Amazon's business remains strong on all fronts. Revenue jumped 14% year over year in Q4. Earnings rose 6% year over year and the increase would have been even better without those aforementioned special charges.
AWS' momentum accelerated in Q4, with revenue soaring 24% year over year. This growth is the strongest that Amazon has seen in 13 quarters. By the way, AWS ended 2025 with an annualized revenue run rate of $142 billion. Jassy was right when he observed in the Q4 call that "it's very different having 24% year-over-year growth on a $142 billion annualized run rate than to have a higher percentage growth on a meaningfully smaller base."
Don't expect AWS' growth to slow anytime soon, either. The cloud service unit's backlog is now $244 billion, up 40% year over year and 22% from the previous quarter.
Amazon has become an advertising juggernaut. Ad revenue increased 22% year over year in Q4 to $21.3 billion. Sponsored product advertising on the company's e-commerce platform is especially lucrative. Prime Video ads are also now a meaningful contributor to revenue growth.
The company's e-commerce business is performing well, particularly in international markets. A recent study conducted by Profitero found that Amazon was the lowest-cost retailer in the U.S. for the ninth consecutive year, with prices 14% lower on average than other top online retailers. Amazon continues to accelerate the speed of its deliveries, which boosts customers' shopping frequency.
Image source: Amazon.
Short-term sell-off, long-term moats
Pullbacks in Amazon's share price have created excellent buying opportunities for investors in the past. I'm confident this will happen again, with the stock rebounding strongly following its latest decline. Amazon is one of the widest-moat stocks I know, thanks in part to its low-price structure and huge scale of operations. And long-term moats are much more important than short-term sell-offs.
