Posted on March 7, 2025, by Niftynews
Amazon stock saw a significant drop of 10.7% in February, despite reporting impressive financial results for 2024 that exceeded expectations. The drop has left many investors wondering about the company’s future prospects, especially considering a looming $100 billion capital expenditure (capex) for 2025. Here’s a breakdown of why Amazon stock took a hit and what investors should be paying attention to in the coming months.
Strong 2024 Results, but Concerns Over $100 Billion Expense
Amazon had a stellar 2024, with operating income reaching a record $68.6 billion, a year-over-year increase of 86%. This surge in income was largely driven by Amazon’s cloud computing division, Amazon Web Services (AWS), which generated over $100 billion in net sales, contributing more than half of the company’s operating income. Despite these impressive numbers, investors began to worry about the company’s aggressive spending plans for 2025, particularly the $100 billion in capital expenditures, mostly for artificial intelligence (AI) investments aimed at enhancing AWS.
Why Investors Are Concerned About Amazon AI Spending
The growth of AWS has been a central pillar of Amazon’s success. Recently, however, the cloud-computing industry has seen a surge in demand for AI services, prompting Amazon to invest heavily in AI technology. To meet this demand, Amazon plans to significantly increase its capital expenditures, expecting to spend $100 billion in 2025, with the majority of that spend directed toward AI for AWS.
This aggressive spending has led to concerns about Amazon’s profit margins. While the company’s spending on AI is crucial for maintaining its competitive edge, investors are wary of the potential impact on profitability. For context, Amazon spent $48.1 billion in 2023 and $77.7 billion in 2024 on capex, and the jump to $100 billion is a substantial increase, raising questions about how this will affect profits.
Amazon’s Profitability Outlook for 2025
Despite the increased spending, Amazon’s management has provided guidance that operating income for 2025 could drop by $700 million compared to 2024. This decline in profits comes at a time when Amazon’s stock is particularly sensitive to changes in profitability. Historically, Amazon stock tends to drop when operating income declines, which is why investors are concerned about the upcoming year.
However, it’s important to remember that even with the projected drop in operating income, 2025 is still on track to be Amazon’s second most profitable year ever. The reality is that the company’s AI investments and AWS growth are vital to its long-term success, and investors should take a long-term view rather than focusing solely on short-term profit fluctuations.
Can Amazon Afford This Spending?
The critical question for investors is whether Amazon can afford its massive capex increase. The answer is a resounding yes. Despite the projected increase in spending, Amazon has demonstrated its ability to handle such expenditures. In 2024, the company spent nearly $78 billion on capital expenditures and still generated $38 billion in free cash flow.
This gives Amazon the financial flexibility to invest heavily in AI and continue growing its cloud services without compromising its financial stability. In fact, Amazon’s ability to spend aggressively on AI while still maintaining strong cash flow underscores its competitive advantage and solidifies its position in the cloud market.
What’s Next for Amazon Stock?
In summary, Amazon stock decline in February was driven by concerns about its AI-related spending and its impact on profitability. However, Amazon remains a dominant force in the cloud-computing sector, and its decision to invest heavily in AI for AWS is necessary to keep up with market demand and stay competitive.
For investors, the key takeaway is that Amazon’s financial health and its position in the market give it the resources to weather short-term profitability dips. If Amazon successfully navigates its AI investments, it could see even stronger growth in the future.
Conclusion: Is Amazon Still a Good Investment?
Despite the short-term stock drop, Amazon’s long-term prospects remain strong. The company’s aggressive investment in AI and cloud computing should pay off as demand for AI-powered services continues to grow. For those with a long-term investment horizon, Amazon stock continues to represent a compelling opportunity, even in the face of near-term volatility.
