Investors recognize Amazon as one of the top-performing stocks of the 21st century, yet the tech giant is currently facing a significant challenge. Its stock has only increased by 22% over the last five years, while the S&P 500 index has seen a much more robust return of 87%.
Recently, Wall Street’s view of Amazon took a hit following its fourth-quarter earnings report. The main concern? The company’s ambitious plans for capital investment might lead to challenges with free cash flow in 2026.
However, we’ll explore reasons why some investors might be misreading Amazon’s potential and why it may still be a solid pick today.
Amazon Web Services (AWS) has seen a surge in demand, particularly from AI startups that are eager to spend. Companies like Anthropic are investing heavily in AWS, which bodes well for future growth.
In its most recent quarter, AWS brought in $35.6 billion, marking a 24% year-over-year increase. Amazon’s spending has also ramped up, with plans to invest $200 billion this year, a notable jump from previous years. This aggressive spending is necessary to enhance its data center capabilities to keep pace with customer demand.
Despite investor concerns about spending exceeding projected cash flow, it could be seen as a positive indicator that Amazon anticipates significant growth opportunities. Historically, during the COVID-19 pandemic, similar investments initially led to negative free cash flow, but soon after, the company rebounded to record levels.
Fast forward a few years, and Amazon may very well be positioned for another resurgence in free cash flow.
Though current trends show diminishing free cash flow due to heavy investments, operating income has grown and reached an all-time high of $85 billion in the last year. This increase is largely driven by AWS revenue growth and the widening of margins in its retail operations. These factors are expected to persist as the company expands its AI infrastructure and develops its profitable sectors, like advertising, with a consolidated operating profit margin projected to reach 15% or more in the coming decade.
Once the accelerated investments in AI taper off, free cash flow could realign with operating income. If Amazon manages to boost its revenue by 15% annually over the next few years, it could surpass the $1 trillion mark by 2026, leading to substantial profit margins.
Before deciding to invest in Amazon, however, it’s worth considering other stocks identified by analysts as leading options at this time. Interestingly, Amazon wasn’t included in a recent list of the top ten stock opportunities.
The stock advisor’s average returns have significantly exceeded the S&P 500, suggesting that while Amazon is still a strong contender, there are other options that might perform even better in the near term.
