Amazon’s recent fourth-quarter report showcased strong performance, yet the company’s projected capital expenditures of approximately $200 billion prompted a notable sell-off in its stock. Over the past month, shares have dropped about 13%, as investors express concerns over the costs associated with expanding artificial intelligence (AI) infrastructure.
Despite the downturn, some analysts argue that the stock may be oversold. While the significant capital expenditures are expected to depress earnings growth in the short term, Amazon’s cloud computing division, Amazon Web Services (AWS), remains a solid investment during this period of increased cloud spending. AWS is not only the leading provider in the cloud sector but also demonstrates promising signs of growth, particularly in the context of AI advancements.
In the fourth quarter, AWS revenue surged 24% year-over-year, reaching $35.6 billion, marking a shift from a 20% growth rate in the previous quarter. The operating income from AWS was a substantial $12.5 billion, comprising half of Amazon’s total operating income of $25.0 billion for that period. This success illustrates that Amazon’s capabilities extend well beyond e-commerce.
The tech giant is also pursuing aggressive pricing strategies within the cloud sector. By developing in-house alternatives to AI chips, such as the Trainium and Graviton chips, Amazon aims to reduce computing costs for its customers while bolstering its competitive edge. These new chips have reportedly achieved an annual revenue run rate exceeding $10 billion and are growing at triple-digit year-over-year rates.
Moreover, Amazon’s consolidated business continues to expand robustly, with net sales rising 14% year-over-year in the fourth quarter to $213.4 billion. E-commerce revenues remain stable, with a 10% increase from online stores. Additionally, the advertising segment has proven lucrative, generating $21.3 billion—an impressive 23% increase year-over-year—thus providing a high-margin revenue stream alongside AWS.
However, Amazon’s ambitious $200 billion capital expenditure plan has left many investors uneasy. This projected spending impacts cash flow, as reflected in the company’s free cash flow decline, which fell to $11.2 billion from $38.2 billion a year prior. Management attributed this decrease to a $50.7 billion surge in capital expenditures, primarily related to investments in AI.
CEO Andy Jassy stated that the investments are driven by strong demand for existing offerings and potential opportunities in AI, chips, robotics, and low Earth orbit satellites. Investors now face the challenge of trusting management’s ability to effectively deploy capital for long-term gains, as the risk of inadequate returns poses a threat to future growth.
Looking ahead, management has provided guidance for first-quarter net sales between $173.5 billion and $178.5 billion, projecting a year-over-year growth of about 13%. However, operating income is expected to grow only 3%, raising further concerns about profitability.
Currently priced at about 29 times earnings, Amazon shares may not be perceived as a bargain. At this level, investors are banking on continued strong growth from AWS and the advertising segment. Nonetheless, analysts argue that Amazon could adjust its spending plans if the returns do not justify the investment.
While risks remain—such as the potential for a broader tech sell-off or challenges in sustaining the AI boom—there is optimism for long-term growth. With AWS showing signs of revitalized momentum and generating sufficient operating income to support expansion, many consider Amazon stock a viable investment option, albeit with caution. Investors are advised to treat this as a high-risk opportunity and to keep their positions modest given the fast-evolving and competitive nature of the cloud computing landscape.
