Amazon Stock: Rising AI Costs Impact

August 20, 2024 08:39 AM PDT | By Invezz
 Amazon Stock: Rising AI Costs Impact
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Amazon Stock Performance

Amazon stock (NASDAQ:AMZN) is experiencing a unique challenge among the megacap technology stocks due to its substantial spending on artificial intelligence (AI) computing, affecting its profitability and stock performance. Following its earnings report at the beginning of August, Amazon stock has lagged behind its mega-cap peers. The e-commerce giant’s focus on AI investments marks a shift from its previous cost-cutting measures, leading to a significant profit surge and a substantial rally in its stock price.

Investors are concerned that increased capital spending will negatively impact cash flows. Historically, Amazon shares have performed better when the company emphasizes improving profitability over boosting investments. The recent shift back to investment mode has led investors to question whether the period of strong stock performance might be paused or over. Since the earnings report, Amazon’s shares have remained more than 3% below their pre-report levels, while the Bloomberg Magnificent Seven Index, which includes other major tech stocks, has gained about 4% in the same period.

Investor Concerns and Market Reactions

The fear that rising spending will hurt profitability is significant for investors, especially since margin expansion was a key driver of Amazon’s stock increase of over 30% to its peak in early July. Daniel Kurnos of Benchmark suggests that recent events could lead to further downward pressure on margins for the next few quarters, with a renewed focus on top-line performance amid a potentially unstable macroeconomic environment.

Amazon’s diverse business model, including retail, video streaming, and film and television, impacts its performance differently compared to its tech peers. Although the AWS cloud unit remains strong, a weaker U.S. consumer could negatively affect its retail segment. Investors appear to be waiting for more information on consumer behavior, which might explain why Amazon stock has underperformed compared to other tech giants.

Moreover, investors are increasingly concerned about Amazon’s growing cash reserves and its lack of dividend payments. Unlike other major tech companies, Amazon does not pay a dividend and has been less aggressive with share buybacks. While its peers have authorized substantial repurchase programs, Amazon’s $10 billion buyback plan, approved in 2022, was less than half complete by the end of June, with no shares repurchased in the last quarter.

Comparative Analysis with Tech Peers

Pressure is mounting on Amazon to compete for investor capital, especially as companies like Meta Platforms Inc. (NASDAQ:META), Alphabet Inc. (NASDAQ:GOOG), and Booking Holdings Inc. (NASDAQ:BKNG) have introduced dividends alongside their buybacks. According to Morgan Stanley analysts led by Brian Nowak, Amazon’s capital return policy is less impactful compared to its peers. If the situation remains unchanged by the end of 2025, Amazon’s net cash balance could constitute approximately 8% of its total market cap, placing it among the top 25 S&P 500 companies by market value. A sustained capital return policy could potentially enhance Amazon’s cash flow multiple.

Despite these challenges, there are indications that investors are starting to buy the dip in beaten-down technology stocks, including Amazon stock, as well as Nvidia Corp. (NASDAQ:NVDA), Microsoft Corp. (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL). Amazon stock has risen about 11% from its most recent low on August 5.

The recent decline in Amazon stock has brought its valuation to approximately 28 times forward earnings, a discount compared to most of the so-called Magnificent Seven, with Alphabet being the only one with a lower multiple. Amazon’s valuation is also slightly above the Nasdaq 100 index, which trades at about 26 times future earnings. Investors continue to view dips in the Magnificent Seven as buying opportunities, with a strong tendency to revert to this strategy until it proves ineffective.

Featured Image: Megapixl

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About the author:
I am a writer and an editor with experience in publishing, research, and SEO strategies. I have an honors BSc in Social Work from the University of Benin, Nigeria.

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