Amazon’s AI spending plans keep stock from joining the tech rebound, as investors remain cautious about the impact on future cash flows. Amazon’s stock has underperformed compared to other mega-cap peers since the company released its earnings report in early August. The e-commerce giant’s announcement that it would prioritize spending on artificial intelligence (AI) computing has led to concerns among investors.
James Abate, Chief Investment Officer at Centre Asset Management LLC, highlighted that investors are worried about the impact of increased capital spending on cash flows. Historically, Amazon’s stock has performed better when the company focuses on boosting profitability rather than ramping up investments, according to Abate.
The recent shift back to spending has led to concerns that the strong performance of Amazon’s stock might stall or decline. Since the earnings report, Amazon’s shares have dipped more than 3%, while the Bloomberg Magnificent Seven Index, a benchmark for megacap tech companies, has seen a gain of about 4%.
Challenges Ahead
The concern over rising expenses is particularly significant given that expanding profit margins was one of the key factors driving Amazon’s stock to a peak in early July, following a more than 30% surge. Daniel Kurnos, an analyst at Benchmark, warned that the positive momentum might be at risk.
Kurnos noted that a combination of factors could put additional pressure on Amazon’s margins over the next few quarters. This comes at a time when the macroeconomic environment is unstable, and the company’s diverse business model—including retail, video streaming, and cloud services—faces varying degrees of exposure to economic shifts.
David Wagner, Portfolio Manager at Aptus Capital Advisors LLC, mentioned that investors are likely waiting for more clarity on consumer behavior, which could explain why Amazon’s stock has lagged behind its peers.
Capital Return Policy Under Scrutiny
Amazon’s approach to managing its cash reserves has also come under scrutiny. Unlike many other megacap tech companies, Amazon has not been returning cash to shareholders through dividends. The company’s $10 billion buyback program, initiated in 2022, remains only partially completed, with no share repurchases in the most recent quarter.
With competitors like Meta Platforms Inc., Alphabet Inc., and Booking Holdings Inc. introducing dividends in addition to buybacks, pressure is mounting on Amazon to reconsider its capital return strategy. According to a note by Morgan Stanley analysts, led by Brian Nowak, Amazon and Tesla Inc. are the only major tech companies without a significant capital return policy.
Analysts point out that Amazon’s AI spending plans keep stock from joining the tech rebound, thus reflecting investor hesitation on new capital expenditures. The analysts estimate that if Amazon does not change its approach by the end of 2025, its net cash balance could represent around 8% of its total market capitalization, making it the second-highest among the top 25 companies in the S&P 500. They believe that a sustained capital return policy could enhance Amazon’s stock valuation.
Investor Sentiments
Despite these challenges, there are signs that some investors are buying the dip in Amazon’s shares, along with other tech giants like Nvidia Corp., Microsoft Corp., and Apple Inc. Amazon’s stock has rebounded about 11% from its most recent low on August 5. Some investors are wary that Amazon’s AI spending plans keep stock from joining the tech rebound, as they wait for more clarity on financial impacts.
The latest decline in Amazon’s stock has brought its valuation to around 28 times forward earnings, which is lower than most of the Magnificent Seven, with only Alphabet having a lower multiple. This valuation is also close to that of the Nasdaq 100 index, which trades at around 26 times future earnings. According to Abate, the trend of buying dips in major tech stocks, like those in the Magnificent Seven, has been a winning strategy for many investors. Until this approach fails, it is likely to continue.
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