Amazon (AMZN) stock has lagged its Big Tech peers over the past year, up about 6% over the past 12 months but down about 7% year-to-date (YTD), making it one of the worst performers within the “Magnificent Seven” group. This underperformance reflects growing competitive pressures in its most profitable segment and growing concerns about future margins.
The main source of caution for investors is Amazon Web Services (AWS), the company’s high-margin cloud computing division. AWS faces intensifying competition from Alphabet’s (GOOGL)-owned Google Cloud and Microsoft’s (MSFT) Azure. Both rivals continue to expand aggressively, investing heavily in infrastructure and artificial intelligence (AI) capabilities to gain market share. As enterprise customers diversify cloud providers and demand advanced AI functionality, AWS operates in an increasingly competitive environment.
Adding to these concerns, Amazon plans to substantially increase its capital expenditures in 2026. During the fourth quarter conference call, Amazon announced $200 billion in capital expenditures, with the majority allocated to AWS.
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Amazon has described a significant increase in capital expenditures, attributing the move primarily to exceptionally strong demand within AWS. The scale of the planned investment reflects the company’s strategic focus on expanding data center capacity and improving its AI infrastructure. Management views this expansion as essential to meeting growing customer demand and sustaining long-term growth in cloud computing and AI-powered services.
AWS is experiencing strong demand, particularly in AI-related workloads. Management indicated that the newly installed capacity is being monetized rapidly. Amazon expects the incremental capacity to be fully utilized. The company believes this expansion will strengthen its competitive positioning in an attractive sector, while supporting strong returns on invested capital over time.
However, increased capital spending is likely to put pressure on margins. Additionally, Amazon’s trailing 12-month free cash flow has steadily declined quarter over quarter, falling from $47.74 billion in Q3 2024 to $11.19 billion in Q4 2025. As capital expenditures will increase further, free cash flow could turn negative in 2026.
In short, Amazon’s rising capital expenditures reflect the company’s strategy to capitalize on strong demand for cloud and artificial intelligence. While investments can strengthen your long-term competitive position and earnings potential, they introduce short- to medium-term pressure on cash flow and profitability metrics.
Increased competition and increased capital spending pose challenges for AMZN stock and add uncertainty. The Street’s lowest price target for AMZN stock is $175, implying a potential drop of about 19% from current levels.
However, despite these pressures, Amazon’s fundamental outlook remains constructive, supported by accelerating performance in its advertising and cloud segments, a rapidly growing chip business, and improving operating metrics within its online retail business. The company’s cloud platform, AWS, generated 24% year-over-year revenue growth in the fourth quarter, marking its fastest expansion in thirteen quarters. AWS’s quarterly revenue increased by $2.6 billion sequentially and nearly $7 billion compared to the prior-year period, leading AWS to an annualized revenue run rate of $142 billion.
In addition to core cloud services, Amazon’s custom silicon portfolio, including its Graviton and Trainium processors, has grown significantly. This chip business has surpassed a $10 billion annual revenue rate and is expanding at triple-digit year-over-year rates. Continued investment in infrastructure capacity and incremental service offerings are expected to further support growth across the AWS ecosystem.
Notably, Amazon is also seeing strong demand for non-AI workloads, driven by ongoing cloud migration initiatives.
Advertising represents another important driver of growth. Fourth-quarter advertising revenue rose 22% year-over-year to $21.3 billion, benefiting from Amazon’s full-funnel strategy that connects brands to consumers across its commerce and media properties.
With strong momentum in AWS and the advertising business, and emerging opportunities in artificial intelligence, custom chips, low-Earth orbit satellite initiatives, and robotics, Amazon’s long-term growth potential remains strong.
Wall Street sentiment remains favorable. AMZN stock has a consensus rating of “Strong Buy,” with an average price target of $284.75, suggesting approximately 32% upside potential from current levels. Meanwhile, the higher price target of $360 implies potential appreciation of about 67% over the next 12 months.
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On the date of publication, Sneha Nahata had no (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
