Amazon Faces Question Marks Amid Cloud Weakness, Rising Capital Expenditures
Cloud Concerns
Recent disappointing results from Alphabet Inc. and Microsoft Corp. raise concerns about Amazon Web Services (AWS), the dominant player in cloud computing. AWS is a key growth driver for Amazon and is a major contributor to Wall Street's positive view of the stock.
Capital Expenditure Surge
The trend of rising capital expenditures (capex) as companies invest heavily in artificial intelligence (AI) could force Amazon to recalculate its profitability projections for the year. If Amazon follows suit with large investments in AI, it could impact the stock's valuation.
AWS Performance and Spending Plans
The performance of AWS and Amazon's spending plans will be closely watched in the company's upcoming earnings report. AWS growth has remained steady, with analysts expecting 19% growth this quarter. However, the overall cloud market has shown signs of weakness.
AI Spending Fatigue
While there is long-term optimism for AI, some investors are showing fatigue with the heavy spending required to develop AI infrastructure. Amazon faces pressure to justify its investments and demonstrate a clear path to monetization.
Capex Outlook
Wall Street projects Amazon's capex to increase to $76 billion in 2024 and $86 billion in 2025. While Amazon has the financial resources to fund these investments, it may need to prioritize AI spending over other areas.
Valuation and Analyst Sentiment
Despite the concerns, Amazon's stock remains highly valued, with analysts recommending a buy and hedge funds showing strong overweight positions. The company's multiple has compressed due to its revenue growth and cost-cutting efforts.
Attractive Valuation and AI Strategy
Some investors view Amazon's valuation as attractive, believing that the company's AI investments will ultimately boost its profitability and market position. They believe the stock price will rise over time as the benefits of these investments become apparent.