Software stocks are experiencing a significant decline, driven by increased capital investments and fears of an artificial intelligence (AI) bubble.
This year has certainly been unusual. Amazon recently caught the eye of investors. Back in early January, the stock jumped about 7% to $247 per share, just shy of its peak. However, over the last month, Amazon’s share price has dropped and is now approximately 14% lower than it was a year ago, mirroring the overall downturn in software stocks.
So, what’s causing this Amazon sell-off? Let’s explore some key factors that savvy investors believe position this drop as a unique buying opportunity.
Why Amazon’s $200 billion AI budget is worth it
Leading up to Amazon’s fourth-quarter earnings report on February 5, Wall Street expected around $150 billion in capital spending for the year. Surprisingly, Amazon plans to invest about $200 billion, exceeding investor expectations.
This hefty investment will focus on GPU procurement, as well as on designing custom silicon and building AI data centers, which may slow the company’s free cash flow generation. This surge in infrastructure spending, combined with a decrease in cash flow, is why many investors are pulling back from Amazon stocks.
But here’s the catch: In the fourth quarter, Amazon Web Services (AWS) reported a notable revenue of $35.6 billion, marking a 24% increase year-over-year. This growth rate is the highest AWS has seen in over three years, suggesting that the upward momentum is just starting. AWS’s backlog, a staggering $244 billion, reflects a 40% increase year-over-year and a 22% rise since Q3.
It’s worth noting that AWS is a high-margin segment for Amazon. The profitability of its e-commerce division can fluctuate significantly, influenced by seasonality and consumer purchasing behavior. In contrast, AWS usually maintains solid operating margins in the mid-30s.
This stability in AWS’s margins fuels Amazon’s robust cash flow, affording the company the financial flexibility to reinvest, as it is doing now.
Beyond the LLM: How Anthropic turns Amazon into an AI ecosystem
A major player in AWS’s resurgence has been the alliance with Anthropic. Their Claude model is intricately woven into the AWS ecosystem, particularly within a product known as Amazon Bedrock.
Moreover, Anthropic utilizes Amazon’s own Trainium and Inferentia chips. This collaboration is helping Amazon build a cost-efficient, vertically integrated AI framework, aiming to transition from basic chatbots to more sophisticated, data-intensive enterprise workflows.
Is Amazon’s withdrawal a buying opportunity?
Many investors appear to be overlooking the tangible outcomes of Amazon’s investments in AI. It seems logical for the company to amplify its spending on infrastructure.
While there could be a delay between the initial capital investment and a substantial return, the data speaks volumes. AWS is evolving beyond merely a capacity service, and the partnership with Anthropic, alongside custom silicon, represents a strategic advantage for Amazon’s AI ambitions.
Nonetheless, the ongoing bear market for software has driven Amazon’s stock down to its lowest point during the AI boom, at least according to price-to-earnings ratio (P/E) metrics.
At this price level, I believe it’s definitely worth considering an investment in Amazon. As the AI trend continues to support major players, the stock appears undervalued with significant upside potential, making it a compelling buy-and-hold opportunity.
