Key Points
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Investors haven’t been too fond of Amazon’s capital expenditure estimates for this year.
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Backlog for its AWS segment totaled $364 billion at the end of the first quarter.
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Amazon is spending to build out its AI infrastructure and increase computing capacity.
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Amazon (NASDAQ: AMZN) has seen much better months than the one it had in June. It finished the month down nearly 12%, reversing a run that saw it reach an all-time high in early May. The only “Magnificent Seven” stock to have a worse month was Microsoft, down 17%.
Despite the slump and underperformance so far this year (through the market close on July 2), Amazon is a no-brainer buy for long-term investors. It may be a rocky ride, but I trust its trajectory.
Amazon’s spending isn’t sitting well with investors
The main critique of Amazon right now by many investors is its spending plans for the year. It plans to have $200 billion in capital expenditures (capex) this year, which is by far the most of any Mag 7 company and likely more than any company in the world. Amazon generates more revenue than any public company in the world, but $200 billion is still massive.
Amazon has long been a premier cash cow, and it will continue to be, but its free cash flow — the money it uses for things like paying off debt and buying back shares — will take a hit under its spending plan.
Most of the spending is going toward building out data centers and other AI infrastructure, so it’s a means to an end. But when you can’t concretely say when you’ll see a return on investment, you’re bound to turn some investors off.
AMZN Capital Expenditures (Annual) data by YCharts
A means to an end
Yes, Amazon’s spending plan is staggering by most standards, and it will take a while before it translates into profits. However, I have no doubt that it will.
Amazon already operates the world’s largest cloud platform, Amazon Web Services (AWS). At the end of last quarter, AWS’s backlog had reached $364 billion. It has way more demand than it can reasonably onboard right now. Ideally, Amazon could monetize that demand immediately, but this isn’t the worst problem to have.
Adding computing capacity is a great thing for Amazon, and with the way the AI arms race is going, it’s better to overspend to have infrastructure in place than to play it too conservatively and risk falling behind. What’s the use in being the biggest moneymaker in the world if you can’t flex your muscles a bit?
You get what you paid for
At the time of writing, Amazon is trading at just under 28 times its projected earnings over the next year. I wouldn’t consider that cheap by any means, but it’s lower than its average over the past three years.
That’s not a bad price to pay for a company with a dominant e-commerce business, the premier cloud computing platform, a fast-growing advertising business, and plenty of other projects that Amazon has its hands in.
I would expect more of the same volatility to finish the year, but Amazon’s long-term prospects remain strong.
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Stefon Walters has positions in Microsoft. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.
