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Amazon (NASDAQ:AMZN) reported strong earnings on Thursday (5 February) but the share price immediately fell 10%. Could this be a huge opportunity for investors?
The stock is clearly down for a reason, but I think the market’s response to the company’s latest update is a big overreaction. So I’m looking forward to buying when I next get the chance.
Firing on all cylinders
Amazon’s core business operations all performed well during the last three months of 2025. Revenues were up 14% and operating income grew 18% compared to the same quarter in 2024.
So far, so good. And there were encouraging results beneath the surface as well, with AWS recording 24% sales growth – still below Microsoft and Alphabet’s cloud units, but a big reacceleration.
Advertising services revenues were up 23%. Given the high profit margins generated by this part of the company, strong growth in this area is a very positive sign.
In terms of business performance, I didn’t see anything for the stock market to dislike about the Q4 results. But it’s not hard to see what made investors nervous about the forecast for 2026.
Raised guidance… sort of
In general, it’s a good thing when companies issue higher guidance for the upcoming year than investors expect. The possible exception, though, is when they’re talking about spending.
Amazon announced plans to invest a staggering $200bn in 2026. That’s even higher than Alphabet’s $185bn, which made investors nervous when the company reported the previous day.
CEO Andy Jassie says the firm is confident of getting a good return on that investment. And it had better be – that’s a huge amount for a company that made $11.2bn in free cash flow in 2025.
Amazon is making a big bet on demand for artificial intelligence infrastructure and there’s no guarantee it’s going to pay off. But I think the stock falling 10% on the news is OTT.
Valuation
From where the stock was trading, a 10% decline represents $230bn in Amazon’s market value. That seems like a lot for a $200bn capital expenditure.
Even if investors think the company is just going to throw the cash away, its market value has fallen by more than the cash it proposes to burn. And that’s why I think the drop went too far.
At the very least, the reaction implies that the market thinks Amazon is making a big mistake with its spending. While that might be true, investors are getting a big discount to take the risk.
Shareholders have seen before what happens to the company’s profits when it focuses on optimising for free cash flows. And I think it’s likely to happen again in the next couple of years.
I’m buying
I’m not at all surprised to see that Amazon is set to record higher capital expenditures than either Alphabet or Microsoft. The company’s strategy is based on pursuing opportunities aggressively.
Investors who are targeting steady cash flows in the next couple of years and shareholder returns in the form of dividends should look elsewhere. But that’s always been the case with Amazon.
With my own investing, I’m happy to wait a few years for some potentially big returns. And that’s why I see the falling share price as a buying opportunity I’m pleased to have.
