A worker near an Amazon delivery vehicle in San Francisco. (David Paul Morris/Bloomberg)
Important points:
- Amazon’s stock price fell 12% in February after the company announced much larger-than-expected AI and data center spending plans.
- Increased capital spending squeezed free cash flow and lowered ROIC, raising investor concerns about lagging earnings and causing stock prices to fall.
- Analysts say new initiatives, including the deal with OpenAI, could support AWS’s future growth, but Amazon could adjust spending if returns are delayed.
Amazon.com may be a leader in the artificial intelligence race, but investors are becoming reluctant to pay the costs of maintaining that position.
The e-commerce and cloud computing giant’s stock plunged 12% in February, its worst month since December 2022, as Wall Street took an increasingly tough view of the company’s aggressive AI investment plans. Not only is capital spending eating away at Amazon’s free cash flow, but market experts are growing anxious about when the company will see profits in dramatic fashion.
Amazon ranks No. 1 on the Transport Topics Top 100 list of North America’s largest logistics companies, No. 15 on the TT Top 100 list of largest private transportation companies, and No. 1 on the TT Top 50 list of the world’s largest transportation companies.
Last month, the stock was the worst performer among the so-called Magnificent Seven technology giants and the worst performer among the 40 weakest companies in the S&P 500 index. It then posted a tepid 5.2% gain in 2025, which was also the weakest return of the Mag Seven.
“Amazon is starting to look like a red flag because its investments are so high, but its returns are among the lowest in Big Tech,” said Adam Rich, deputy chief investment officer and portfolio manager at Vaughn Nelson Investment Management, where he oversees more than $15 billion in assets. “The growth we are seeing is not enough to justify increased capital spending.”
Amazon fell about 2% on March 2, as part of a broader decline in stock markets following military attacks across the Middle East.
The gates opened again on February 27th, as Amazon announced it would invest $50 billion in OpenAI. As part of the cyclical nature of the agreement, OpenAI also plans to spend an additional $100 billion over eight years under its current agreement with Amazon Web Services.
Much of the recent downturn comes on the heels of Amazon’s earnings report in early February, which included plans to spend $200 billion this year on data centers, chips and other equipment to expand computing power. That target far exceeded expectations, resulting in a disappointing operating profit forecast and completely eclipsing Amazon Web Services’ fastest quarterly growth rate in more than three years.
As a result of the spending, Amazon’s free cash flow is expected to be negative by $524.2 million in 2026, the first time it has had negative cash flow since 2022, according to data compiled by Bloomberg. Free cash flow in 2025 is reported to be $7.7 billion.
Amazon isn’t the only tech giant whose spending has come under scrutiny. Microsoft Corp. similarly fell after disclosing a sharp increase in capital spending. Coreweave plunged 19% on February 27, its biggest decline since August, after the company reported higher-than-expected capital spending targets and higher-than-expected losses.
Of course, the sharp decline has made Amazon stock look relatively cheap, with an estimated P/E of less than 22 times, less than half the 20-year average of 50 times. The stock is trading near its largest discount to the tech-heavy Nasdaq 100 index in history. It’s also much cheaper than Walmart, which has a multiple of more than 43 times, even though Amazon recently replaced retail giant Walmart as the world’s largest global company by sales.
The focus on AI spending as a risk for Big Tech represents a shift in sentiment among investors who, not so long ago, viewed pouring money into emerging technologies as a bullish signal. This transformation coincides with the impact of increased capital spending on corporate finances. Amazon’s return on invested capital (ROIC) for the fourth quarter was 12.4%, down from 14.8% two quarters ago, its highest ROIC since 2011.
“It looks oversold based on the multiple, but we see ROIC trending downward over the medium term. As long as ROIC continues to decline, the market won’t reward it,” said Rich, whose company owns Amazon stock. “I try to balance these two ideas.”
Indeed, many Wall Street experts still see the company’s spending as leading to future growth. William Blair analyst Dylan Carden said in a Feb. 27 note to clients that the Feb. 27 OpenAI deal “puts into context last quarter’s $200 billion capital investment announcement as AWS rapidly scales to support this massive new customer.”
Beyond AWS, Amazon bulls have many reasons to believe the company’s AI position remains strong. OpenAI’s contract includes the use of the company’s Trainium chip and provides validation for its business. Amazon is also a long-time investor in Anthropic, an AI startup that is making ripples throughout the market. Amazon’s aggressive use of robotics is also expected to improve the efficiency of its vast network of warehouses and logistics.
These dynamics are why Amazon remains a consensus favorite on Wall Street, despite its recent stock slump. Of the 83 analysts covering the company, 78 rated it a buy, five rated it a hold, and none recommended a sell, according to data compiled by Bloomberg. The 12-month price target of $282.65 represents an increase of approximately 35% from the stock’s closing price on February 27th.
Andrew Choi, a portfolio manager at Parnassus Investments, which manages $43 billion, said Amazon is “probably the most attractive equity opportunity of the Magnificent Seven.”
“We’re growing fast, our multiples are low, and we’re certainly going through an investment cycle, but if it turns out we’ve invested too much, we’ll just roll back the investment and the cash flow will recover,” he said. “No matter how you cut it, it just looks appealing.”
