Significant Error Committed by Investors in Purchasing Amazon Shares
Amazon Stock Underperforms Amid Cloud Growth Concerns and Investment Plans
Amazon's stock has taken a hit in recent times, underperforming both the S&P 500 and Nasdaq Composite. This decline can be attributed to a growth slowdown in Amazon Web Services (AWS), disappointing third-quarter guidance, and reduced free cash flow due to increased spending on strategic investments.
Key factors contributing to Amazon’s recent pullback include:
- AWS Growth Deceleration: AWS, a major profit driver, is growing more slowly compared to Microsoft Azure and Google Cloud, which is concerning to investors focused on cloud growth leadership and AI integration.
- Third-Quarter Guidance: Amazon’s Q3 2025 guidance projects only 10-13% revenue growth with a possible operating income decline of up to 11% or an increase of 18%, signaling uncertainty and slower momentum than the market expected.
- Free Cash Flow Decline: Amazon’s free cash flow dropped drastically from $53 billion in the year ended June 2024 to $18.2 billion in the trailing 12 months through June 2025 as the company reinvests heavily into expanding AWS data centers, launching generative AI tools, and expanding delivery capabilities.
- Capital Allocation Strategy: Amazon is aggressively deploying capital back into the business to fund long-term growth initiatives such as AI innovations and logistics enhancements, weighing on near-term profitability and cash flow.
- Stock-Based Compensation: While specific details were not cited, elevated stock-based compensation can depress earnings per share and weigh on valuation metrics, a common challenge for companies with heavy incentive programs.
Despite these challenges, some analysts view Amazon as undervalued based on long-term fair value estimates, suggesting the current stock price reflects concerns over near-term growth challenges rather than permanent competitive decline.
AWS, the undisputed leader in the global cloud market, has its dominant market share partly due to its entrenched position in the industry. However, the market’s strong focus on AI innovation favors Microsoft and Alphabet, leading to Amazon being seen as a "lagging giant" in AI-driven cloud growth, contributing to weaker stock performance relative to the tech sector.
Notably, Amazon hasn't repurchased stock in years and doesn't pay a dividend. Its forward price-to-earnings (P/E) ratio is 33.9, which is nearly identical to Microsoft's 33.6 forward P/E ratio.
Amazon is investing in expanding AWS capacity and AI capacity to bolster its competitive advantages. This includes building out AWS data centers, launching generative AI tools, and expanding Amazon Prime delivery capabilities. However, this aggressive investment strategy has led to an increase in its outstanding share count, diluting existing shareholders.
Investors looking for a company with a more balanced capital allocation may want to consider Microsoft or Alphabet as preferred cloud plays over Amazon. On the other hand, for folks looking to invest in the cloud and who believe in the strength of Amazon's core e-commerce and advertising business, Amazon may still be a decent valuation.
[1] CNBC (2025). Amazon stock plummets as free cash flow drops and revenue guidance falls short. [online] Available at: https://www.cnbc.com/2025/07/29/amazon-stock-plummets-as-free-cash-flow-drops-and-revenue-guidance-falls-short.html [2] MarketWatch (2025). Amazon stock: What's the outlook? [online] Available at: https://www.marketwatch.com/story/amazon-stock-whats-the-outlook-11648486911 [3] Yahoo Finance (2025). Amazon.com Inc. (AMZN) Stock Summary. [online] Available at: https://finance.yahoo.com/quote/AMZN/profile [4] TechCrunch (2025). AWS slows as Microsoft Azure and Google Cloud outpace Amazon in cloud growth. [online] Available at: https://techcrunch.com/2025/07/30/aws-slows-as-microsoft-azure-and-google-cloud-outpace-amazon-in-cloud-growth/ [5] Seeking Alpha (2025). Amazon's Q2 2025 Earnings Call Transcript. [online] Available at: https://seekingalpha.com/symbol/AMZN/earnings/4447583-amazon-com-inc-earnings-call-transcript-q2-2025
