Amazon (AMZN) stock has underperformed its Big Tech peers over the past year, rising nearly 6% over the past 12 months but down nearly 7% year-to-date (YTD), making it one of the weakest performers in the “Magnificent Seven” group. This underperformance reflects growing competitive pressure in its most profitable segment and growing concerns about future margins.
The main source of investor concern is Amazon Web Services (AWS), the company’s top-rated cloud computing division. AWS faces intensifying competition from Google Cloud, owned by Alphabet ( GOOGL ), and Microsoft ( MSFT ) Azure. Both competitors continue to grow aggressively, investing heavily in infrastructure and artificial intelligence (AI) capabilities to gain market share. As enterprise customers diversify their cloud providers and demand advanced AI functionality, AWS is operating in a competitive environment.
Adding to this concern, Amazon plans to significantly increase its capital expenditures in 2026. During the fourth quarter conference call, Amazon announced $200 billion in capital spending, most of which was allocated to AWS.
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Amazon revealed the significant increase in capital expenditures, citing the move as a result of strong demand within AWS. The planned investment ratio reflects the company’s strategic focus on expanding data center capacity and improving its AI infrastructure. Management views this structure as critical to meeting immediate customer demand and sustaining long-term growth in cloud computing and AI-driven services.
AWS is facing strong demand, especially in AI-related jobs. The management stated that the newly installed capacity is making money quickly. Amazon expects the additional capacity to be fully utilized. The company believes that this expansion will strengthen its competitive position in the attractive sector, while supporting a strong return on investment over time.
However, increased spending is likely to put pressure on margins. In addition, Amazon’s trailing 12-month free cash flow has consistently declined quarter over quarter, falling from $47.74 billion in the third quarter of 2024 to $11.19 billion in Q4 2025. As capital expenditures will continue to rise, free cash flow may turn negative in 2026.
Overall, Amazon’s rising costs reflect the company’s strategy to capitalize on strong demand for cloud and AI. While the investment may strengthen its long-term competitive position and revenue potential, it presents short- to medium-term pressure on cash flow and profitability metrics.
Increased competition and higher capex pose challenges for AMZN stock and add uncertainty. The Street’s lowest price target for AMZN stock is $175, which means a potential downside of about 19% from current levels.
However, despite these pressures, Amazon’s fundamental outlook is still building, supported by accelerating operations in the cloud and advertising divisions, a fast-growing chip business, and improving performance metrics within its online retail business. The company’s cloud platform, AWS, delivered 24% year-over-year (YOY) revenue growth in the fourth quarter, marking its fastest growth in thirteen quarters. AWS’s quarterly revenue was up $2.6 billion sequentially and nearly $7 billion year-over-year, bringing AWS to a $142 billion operating margin.
In addition to core cloud services, Amazon’s custom silicon portfolio, including Graviton and Trainium processors, has grown meaningfully. This chips business exceeded the average annual revenue of $10 billion and grew by triple digits YOY. Continued investment in infrastructure capacity and increased service offerings is expected to continue to support growth across the AWS ecosystem.
Notably, Amazon is also experiencing strong demand for non-AI jobs, driven by ongoing cloud migration plans.
Advertising represents another important driver of growth. Q4 advertising revenue increased 22% YOY to $21.3 billion, benefiting from Amazon’s full-funnel strategy that connects brands and consumers across all aspects of its commerce and media.
With strong momentum in AWS and the advertising business, and emerging opportunities in AI, custom chips, low Earth orbit satellite systems, and robotics, Amazon’s long-term growth potential remains strong.
Wall Street sentiment is always positive. AMZN stock carries a consensus rating of “Strong Buy”, with an average price target of $284.75, suggesting a potential upside of about 32% from current levels. Meanwhile, the highest price target of $360 implies a potential appreciation of 67% over the next 12 months.
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As of the date of publication, Sneha Nahata did not have (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
