Amazon's (AMZN +0.86%) valuation has done something surprising. Even though a 29 price-to-earnings (P/E) ratio may not sound cheap, the stock is coming off its lowest valuation since the financial crisis.
The company operates in competitive industries such as retail and cloud computing, and its spending on capital expenditures (capex) likely scared some investors. Nonetheless, Amazon's P/E ratio does not drop below 30 often. Knowing that, has the sell-off in the consumer discretionary stock gone too far, or are Amazon's days of commanding high valuations over?
Image source: Amazon.
The state of Amazon
It is easy to understand why Amazon's capex spending concerns many investors. It pledged to spend $200 billion on capex in 2026 alone. This is not unusual in today's tech industry but is more than the $175 billion to $185 billion from Alphabet or the $125 billion to $145 billion pledged by Meta Platforms.
Moreover, despite its $143 billion in liquidity, the capex spending reduced free cash flow to just $1.2 billion over the trailing 12 months. Consequently, it sold bonds this year to help cover capex costs, including an issuance of at least $25 billion this month. Considering its massive liquidity, such an act would have seemed unimaginable until recently.
NASDAQ: AMZN
Key Data Points
However, investing in artificial intelligence (AI) seems to have improved the company's performance, including in its e-commerce segments. In the first quarter of 2026, net sales rose by 17% year over year, close to double the 9% annual increase reported in Q1 2025.
In the same quarter, net income increased by 77% year over year, even more than the 64% annual increase in Q1 2025. Considering that growth, investors might perceive 29 times earnings as a historically cheap valuation. Still, analyst estimates call for a more modest 21% increase in profits for the year, a significant slowdown that could cool investor enthusiasm about the lower P/E.
Has the selling of Amazon stock gone too far?
Considering Amazon's history, capex spending, and improved results, Amazon appears to be in oversold territory. Admittedly, the P/E ratio shows the stock has not become a screaming bargain, as the heavy capex spending and coming slowdown in profit growth may understandably give investors pause.
Nonetheless, Amazon is clearly making that investment to stay competitive in AI. Moreover, seeing its P/E ratio fall below 30 is unusual, even with the more conservative profit growth forecasted by analysts.
Additionally, the capex spending has helped boost net sales growth and brought massive profit increases in recent quarters. Assuming net income grows by well above 21%, Amazon stock could regain some traction.
Ultimately, such an improvement is speculation, and it is unclear whether Amazon has bottomed. Still, if one wants to begin building an Amazon position, now is probably a good time to start that process.
