Amazon Stock Performance
Amazon stock (NASDAQ:AMZN) is facing a unique challenge among its tech giant peers due to its substantial investment in artificial intelligence (AI) computing. This investment strategy has had an impact on its profitability and stock performance. After its earnings report in early August, Amazon’s stock has fallen behind its mega-cap peers. The e-commerce giant’s shift towards AI investments, after a period of cost-cutting measures, has resulted in a significant surge in profits and a strong rally in its stock price. However, this newfound focus on AI is causing concerns among investors.
Investors are worried that the increased capital spending will have a negative impact on cash flow. Historically, Amazon’s shares have performed better when the company prioritized profitability over increased investments. The recent shift back to investment mode has led investors to question whether the period of strong stock performance might be coming to an end. Since the earnings report, Amazon’s shares have remained more than 3% below their pre-report levels, while the Bloomberg Magnificent Seven Index, which includes other major tech stocks, has gained about 4% in the same period.
Investor Concerns and Market Reactions
The fear that rising spending will hurt profitability is a major concern for investors, particularly since margin expansion was a key driver of Amazon’s stock increase of over 30% to its peak in early July. Daniel Kurnos of Benchmark suggests that recent events could lead to further downward pressure on margins for the next few quarters, with a renewed focus on top-line performance amid a potentially unstable macroeconomic environment.
Amazon’s diverse business model, encompassing retail, video streaming, and film and television, has a different impact on its performance compared to its tech peers. While its AWS cloud unit remains robust, a weaker U.S. consumer could negatively affect its retail segment. Investors seem to be waiting for more information on consumer behavior, which might explain why Amazon’s stock has underperformed compared to other tech giants.
Additionally, investors are increasingly concerned about Amazon’s growing cash reserves and its lack of dividend payments. Unlike other major tech companies, Amazon does not pay a dividend and has been less aggressive with share buybacks. While its peers have authorized significant repurchase programs, Amazon’s $10 billion buyback plan, approved in 2022, was less than half complete by the end of June, with no shares repurchased in the last quarter.
Comparative Analysis with Tech Peers
Pressure is mounting on Amazon to compete for investor capital, particularly as companies like Meta Platforms Inc. (NASDAQ:META), Alphabet Inc. (NASDAQ:GOOG), and Booking Holdings Inc. (NASDAQ:BKNG) have introduced dividends alongside their buybacks. According to Morgan Stanley analysts led by Brian Nowak, Amazon’s capital return policy is less impactful compared to its peers. If the situation remains unchanged by the end of 2025, Amazon’s net cash balance could constitute approximately 8% of its total market cap, placing it among the top 25 S&P 500 companies by market value. A sustained capital return policy could potentially enhance Amazon’s cash flow multiple.
Despite these challenges, there are indications that investors are starting to buy the dip in beaten-down technology stocks, including Amazon stock, as well as Nvidia Corp. (NASDAQ:NVDA), Microsoft Corp. (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL). Amazon’s stock has risen about 11% from its most recent low on August 5.
The recent decline in Amazon’s stock has brought its valuation to approximately 28 times forward earnings, a discount compared to most of the so-called Magnificent Seven, with Alphabet being the only one with a lower multiple. Amazon’s valuation is also slightly above the Nasdaq 100 index, which trades at about 26 times future earnings. Investors continue to view dips in the Magnificent Seven as buying opportunities, with a strong tendency to revert to this strategy until it proves ineffective.