Massive AI spending caps, Amazon's stock price lacks upward momentum

Compared to other large tech stocks, Amazon (AMZN.US) has made significant investments in artificial intelligence at the expense of profits, causing its stock price to take a hit. Since releasing its earnings report in early August, Amazon's stock performance has lagged behind its large-cap peers. At that time, the e-commerce giant informed investors that it would prioritize spending on AI computing. This move came after a period of cost-cutting, which led to a surge in profits and drove the stock price up by more than double from its low point at the end of 2022.

James Abate, Chief Investment Officer of Centre Asset Management LLC, stated: "Investors are concerned that increased capital expenditures will impact cash flow. Compared to increased investments, Amazon tends to perform better when focusing on improving profitability."

Abate added that this shift in investment spending approach "makes investors aware that the important period of outperformance of the stock may be at least temporarily halted." Amazon's stock price is still over 3% lower than before the financial report was released, while the Bloomberg Magnificent Seven Index rose by about 4% during the same period.

According to Zhitong Finance, investors are most concerned that increased spending will affect profitability, as profit margin growth was one of the main trends driving Amazon's stock to its peak in early July, with the stock rising by over 30% in this rally. Benchmark analyst Daniel Kurnos believes that this positive momentum may now face risks.

Kurnos stated: "A series of specific events may collectively put downward pressure on profit margins in the coming quarters." In a report on August 2, he wrote that this could also make people "more focused on the company's revenue" when the macroeconomic outlook appears most unstable.

"Macroeconomic factors" have a greater impact on Amazon than on other tech giants with large market capitalization, as the company has a wide range of product categories. The combination of retail, video streaming, and entertainment businesses sets it apart and exposes it to different aspects of economic development. While AWS cloud business remains a bright spot, softness in U.S. consumer spending could weigh on the retail business.

Portfolio manager David Wagner of Aptus Capital Advisors LLC said, "Investors seem to be waiting for more information about consumers. This may be one of the reasons why the stock is lagging behind some of its peers."

Investors may also be increasingly dissatisfied with Amazon's reluctance to return cash to shareholders in a significant way. Despite accumulating cash reserves, the company is one of the few large tech companies that does not pay dividends. In terms of buybacks, it is also not as generous as other large tech companies.

While other peers have approved buyback plans ranging from hundreds of billions to trillions of dollars, Amazon's $10 billion buyback plan approved in 2022 was not even halfway completed by the end of June. The company did not complete any stock buybacks last quarter.

Analysts at Morgan Stanley led by Brian Nowak wrote in a report on August 18th that with Meta (META.US), Alphabet (GOOGL.US), and Booking Holdings (BKNG.US) increasing dividends on top of buybacks, the pressure on Amazon to compete for investor capital may be greater.

Nowak wrote that this puts Amazon second only to Tesla (TSLA.US) among tech giants without a "meaningful capital return policy." Nowak added, "If there is no change by the end of 2025, we estimate Amazon's net cash balance will account for around 8% of its total market value." By market value, this would rank it second among the top 25 companies in the S&P 500 index. He noted, "In our view, a sustained capital return policy could lead to a higher multiple of Amazon's cash flow."

However, there are signs that investors are buying back into battered tech giant stocks, buying stocks that have suffered significant declines such as Amazon, NVIDIA (NVDA.US), Microsoft (MSFT.US), and Apple (AAPL.US). Amazon's stock has risen by about 11% from its low on August 5th. The recent decline in stock prices has brought Amazon's forward P/E ratio to around 28 times, lower than most of the so-called "Fabulous Five" tech giants—only Alphabet has a lower forward P/E ratio than Amazon. Compared to the Nasdaq 100 index, Amazon also has only a slight premium, with the Nasdaq 100 index having a forward P/E ratio of around 26 times