E-commerce leader Amazon.com (AMZN) saw its shares drop 5.6% intraday on February 6 after reporting its fourth-quarter earnings on February 5. The reason for this post-earnings drop was due to the company’s growing CapEx, which is expected to rise to $200 billion by 2026, as Amazon expands its artificial intelligence (AI) aspirations.
However, the AI boom risks becoming a bubble, raising concerns among investors that it is about to burst. Amazon has already lost around $300 billion in market capitalization as investors have reacted pessimistically to rising AI costs. Analysts at DA Davidson downgraded the stock to “Neutral” after the earnings release, citing concerns related to its spending plans and the potential for AI to erode its retail business.
Should you consider capitalizing on Amazon shares now?
Headquartered in Seattle, Washington, Amazon is a leader in e-commerce and cloud computing through AWS. Its vast operations serve millions of people around the world and dominate online retail. The company has a market capitalization of $2.25 trillion.
AWS’s slow growth fueled concerns that it was missing out on AI opportunities amid growing competition. E-commerce faced tough competition from Walmart. The company is also cutting jobs and pushing for organizational changes. As a result, Amazon stock has been hit by a bout of volatility.
Over the past 52 weeks, the stock has fallen 8.48% and is down 9.14% year-to-date (YTD). The stock hit a 52-week high of $258.60 in November, but is down 19% from that level.
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On a forward-adjusted basis, Amazon shares are trading at 27.40 times, higher than the industry average of 17.94 times.
Despite a sharp share decline after the fourth quarter, Amazon’s results showed broad growth. The company’s total net sales increased 14% year over year (YOY) to $213.39 billion, surpassing the $211.46 billion that Wall Street analysts were expecting. This growth was driven by the expansion of sales of products and services. Excluding a favorable impact from year-over-year changes in exchange rates during the quarter, net sales increased 12%.
The company continues to enjoy significant influence in the e-commerce space. For example, Amazon’s online store sales rose 10% from the prior-year period to $82.99 billion, while Profitero named it the lowest-priced U.S. retailer for the ninth consecutive year, as its online prices are on average 14% lower than those of other major U.S. retailers.
The AWS segment grew the fastest in 13 quarters, rising 24% year-over-year to $35.58 billion. The segment also reported high operating income of $12.47 billion during the quarter.
Overall, Amazon’s operating income rose 18% from its year-earlier value to $24.98 billion. However, the company’s operating income included three one-time charges totaling approximately $2.44 billion for tax disputes related to Italian stores, severance pay, impairment of store-related assets and a lawsuit settlement. Without them, it would have reached $27.4 billion.
However, Amazon’s results grew more slowly than revenue for the quarter. Its EPS for the fourth quarter was $1.95, on a diluted basis, up 5% from a year ago. However, the figure fell short of the figure expected by Wall Street analysts of $1.98.
For the first quarter, Amazon expects net sales to be in the range of $173.5 billion to $178.5 billion, implying year-over-year growth of 11% to 15%. Operating income is projected to be between $16.50 billion and $21.50 billion, compared to $18.40 billion in the prior-year period. The operating income guidance includes a $1 billion year-over-year increase in costs, primarily related to Amazon Leo, the company’s low-Earth orbit satellite network.
Wall Street analysts have a positive view on Amazon’s earnings trajectory. For the current quarter, its EPS is expected to grow 6.3% year-over-year to $1.69. For fiscal 2026, the company’s EPS is projected to increase 9.8% annually to $7.87, followed by a 21.7% increase to $9.58 in fiscal 2027.
Following its fourth-quarter results, most analysts have reaffirmed their ratings on Amazon stock. Analysts at Wells Fargo maintained an “overweight” rating and raised the price target from $301 to $305. Guggenheim’s Steven Forbes also maintained a “Buy” rating on Amazon, with a price target of $300.
Amazon has been a Wall Street darling for quite some time, with analysts giving it an overall consensus rating of “Strong Buy.” Of the 57 analysts who rated the stock, a majority of 49 analysts have rated it a “Strong Buy”, five analysts suggest a “Moderate Buy”, while three analysts play it safe with a “Hold” rating. The consensus price target of $297.51 represents a 42.4% upside from current levels. Furthermore, the Street’s high price target of $360 indicates an upside of 72.3%.
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Despite valid concerns that the bursting of an AI bubble could hurt Amazon’s stock, the company’s retail business continues to grow, which may be the moat that offsets potential losses from its AI ambitions. With Wall Street analysts remaining bullish on the stock, it could be worth capitalizing on Amazon’s decline.
As of the date of publication, Anushka Dutta had no (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
