Amazon (AMZN 1.31%) can rarely catch a break from market negativity these days.
The company, which is now the largest company in the world by sales on a trailing 12-month basis, should be receiving accolades based on its strong performance and seemingly endless opportunities. There are few industries at this point where it doesn't touch some kind of base. But Amazon stock plunged after earnings recently, and it's down 8% over one year as of this writing.
Is this an incredible opportunity for investors? Or is it a huge mistake to buy now? Let's check it out.
Image source: Amazon.
Investing for the shift
One of CEO Andy Jassy's favorite things to talk about on company earnings calls is the unprecedented opportunity in artificial intelligence (AI) and the cloud. He keeps discussing the massive shift that is already happening, with the 85% to 90% of company informational technology spend that's still on the premises moving to the cloud, and the massive windfall coming Amazon's way as the dominant global cloud services provider.
Jassy made it clear that Amazon is investing to be ready for this shift, and that's why it's raising its capital expenditure spend to $200 billion in 2026. There are huge opportunities to grow the business, but Amazon won't be able to take advantage of the shift unless it has the necessary infrastructure in place.
He also made it clear that the investments are already paying off. "We are monetizing capacity as fast as we can install it," he said.
In anticipation of a negative reaction, he defensively explained that the company is experienced with recognizing high demand, and it's pre-empting it by building out capacity.
There are some obvious signs. Cloud segment Amazon Web Services (AWS) sales growth accelerated to a 24% year-over-year increase in the fourth quarter as customers increased their own spend. Customers using Bedrock, AWS' signature AI builder, increased 60% sequentially. Those are just two examples.
NASDAQ: AMZN
Key Data Points
What's really going on
At the current price, Amazon stock trades at a price-to-earnings (P/E) ratio of 29, near its several-decade low of 27, which it dipped to in last April's market drop. However, it trades at a price-to-free cash flow ratio of 296, which is incredibly high.
Trailing 12-month free cash flow decreased from $38.2 billion to $11.2 billion year over year in the fourth quarter, due to the company's AI investments. When you look at it that way, Amazon's price drop makes a lot more sense. As long as it's shelling out cash to pay for the investments, its own cash flows are affected in the here and now, and at these levels, Amazon stock isn't worth as much.
But that still spells opportunity for the patient investor. Amazon is building a leading AI platform, and the investment is likely to pay off. There could be continued volatility until the results are more firmly established, but if you can hold through it, now could be a great time to buy.
