Amazon’s AI Spending Plans Keep Stock From Joining Tech Rebound

More than any of the megacap technology stocks, Amazon.com Inc.’s big spending ways are coming at the expense of profits, and its shares are being punished as a result.

Amazon’s stock performance has lagged its megacap peers since its earnings report at the beginning of August, when the e-commerce giant signaled to investors that it would be prioritizing spending on artificial intelligence computing. The move is a shift back into investment mode after a period of cost cutting that led to a surge in profits and helped fuel a rally that’s seen the shares more than double from a late 2022 low.

“Investors are worried that the increase in capital spending will impact cash flows,” said James Abate, chief investment officer at Centre Asset Management LLC. Amazon shares tend to outperform when it’s focused on improving profitability, compared with when it’s boosting investments, Abate said.

The switch back to spending mode “has investors recognizing that the significant period of outperformance for the stock may be at least on pause if not over for a period of time,” Abate added. Amazon shares remain more than 3% below where they traded prior to the results, compared with a gain of about 4% for the Bloomberg Magnificent Seven Index over that span.

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The worry that increased spending will crimp profitability is top-of-mind for investors, given that margin expansion was among key trends that lifted Amazon shares during a run of more than 30% to a peak in early July. Daniel Kurnos at Benchmark sees that positive momentum now potentially at risk.

“A confluence of particular timing of events could conspire to put incremental downward pressure on margins for the next couple of quarters,” according to Kurnos. This could also put a “sharper focus back on the top line at a time when the macro appears to be unstable at best,” he wrote in an Aug. 2 note.

The “macro” affects Amazon differently to its megacap tech peers because of the company’s mix of offerings. The combination of retail, video streaming and film and television businesses sets it apart and also brings varying exposure to developments in the broader economy. While the AWS cloud unit remains a bright spot, a weaker US consumer could drag on retail.

amazon trailing