Amazon's Stock Faces Pressure, Yet AI Innovations Promise Future Rebound
2min read As of last week, amazon (AMZN) saw its stock price decline by 4.29%. Over the past week, the stock fell by 1.78%, contributing to a year-to-date decrease of 12.16%, with a latest market capitalization of $2,042.39 billion.
Amazon's current stock valuation appears to be "attractive" as its stock price has fallen significantly alongside major U.S. stock indices. This downturn, coupled with expected long-term profitability growth, positions the company's valuation at historically low levels since its IPO in 1997. In a weakened overall market environment, this could curb further downside potential. Moreover, Amazon's leadership in cloud computing and AI platform development could drive a substantial rebound in its stock price.
Investment Manager Clayton Allison of Prime Capital Financial states, "Given Amazon's massive e-commerce operations and its comparison with the broader technology sector, its current valuation multiples are highly attractive. Considering its multiple long-term growth drivers, it represents a compelling investment opportunity in the U.S. stock market."
Despite the recent sell-off in tech stocks, dragging down valuations significantly, Amazon's price-to-earnings ratio remains historically low at approximately 27x, a notable discount to its ten-year average. This is even lower than retail giants like Walmart and Costco, which once had lower valuations. Amazon, once valued multiple times higher than Apple, now finds itself at a steep discount.
The significant markdown in valuation stems from Amazon's focus on enhancing operational efficiency in its cloud computing and e-commerce businesses, resulting in improved profitability but restricted revenue growth. In the short term, the stock faced pressure from broader market sell-offs, influenced by various macroeconomic factors that affected both consumer and business confidence in the U.S.
This year, Amazon's stock has fallen approximately 6%, marking a seven-week losing streak, the longest since May 2022. While underperforming against the Nasdaq 100 index, which includes the world's leading tech companies, Amazon slightly outperformed the Bloomberg Magnificent 7 Index.
The so-called "Magnificent Seven," composed of Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, have been key drivers for the S&P 500's highs. Since the start of 2023, they have led U.S. stock market gains, buoyed by strong AI-driven revenue growth, robust fundamentals, consistent free cash flow generation, and substantial stock buybacks that have drawn global investor interest.
Amazon's latest AI-enhanced version of the Alexa voice assistant is viewed as a new driver for long-term earnings growth. Analysts widely project Amazon's overall revenue growth to rise to 9.6% and 10.4% in 2025 and 2026, respectively, with net margins increasing significantly from 15% to 20% in the same period.
Cloud computing and AI ecosystem platforms are core factors in analysts' bullish outlook for Amazon's future stock performance. This optimism is reflected in Wall Street's highest target price of $300 for Amazon.
Amazon, alongside Microsoft, is focusing on developing a cloud-based AI ecosystem to cater to both enterprise and consumer application developers. This initiative aims to lower the technical barriers for non-IT professionals in creating AI applications, a strategy that involves powerful cloud-based AI computing platforms.
Amazon Web Services (AWS), leading in cloud computing market share, has launched the Amazon Bedrock AI application development ecosystem, attracting a large enterprise client base. In Q4, AWS revenue grew by 19% year-over-year to $28.8 billion, driven by Amazon Bedrock and its core cloud business.
However, short-term challenges persist, such as geopolitical uncertainties affecting consumer spending and AI/cloud service penetration rates. Concerns over Amazon's aggressive AI investment strategies and potential overcapacity might pressure profit expectations amid a challenging macroeconomic environment.
Investors are increasingly focused on when substantial AI investments will yield tangible returns. Kristian Kerr, macro strategy director at LPL Financial, points out, "The initial tech stock enthusiasm has cooled, yet clear visibility on AI prospects is necessary to drive sustainable higher stock prices." 
