Amazon.com, Inc. (NASDAQ:AMZN) has been flat during the last six months, as of October 15. This compares to a 21.5% return for the Insider Monkey Billionaire Index and 15.74% for the State Street SPDR S&P 500 ETF Trust.
Amazon has a history of building businesses that eventually become valuable in their own right. AWS started with the infrastructure Amazon needed to run its website, while advertising grew out of the traffic coming to its online store. Now, the company is looking for similar opportunities with its custom chips and logistics network. The strategy has worked before, but Amazon is spending on a much larger scale this time. The big question is whether these investments will deliver returns that justify the cost.
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Amazon Keeps Finding New Ways to Grow
Amazon Supply Chain Services, launched in May, allows outside companies to use its freight, distribution, fulfillment, and parcel delivery network. Procter & Gamble, 3M, Lands’ End and American Eagle were among its first customers. The company is taking a similar approach with its Trainium and Graviton chips, which were developed for AWS but could eventually find customers beyond Amazon’s own cloud.
The attraction is easy to understand. Amazon has already spent years building these capabilities, so selling them to outside customers creates another way to earn money from that investment. But there is a difference between cloud computing and logistics. Every additional shipment brings costs for labor, transportation, and handling. The business will only make sense if Amazon can attract enough customers to generate profits without disrupting deliveries to its own shoppers.
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AI Could Drive More Than Chip Demand
AWS has more to gain from AI than simply selling computing power to companies developing models. AI applications also need storage, databases, security, and the computing resources required to run them in everyday business operations. Bedrock allows customers to choose from different AI models, while multi-year commitments from Anthropic and OpenAI give Amazon another route to benefit from demand for Trainium. It does not necessarily need to develop the industry’s leading model to make money from AI.
Cloud migration offers another opportunity. CEO Andy Jassy has pointed out that much of the world’s IT spending is still tied to on-premises infrastructure. As companies move more of their systems to the cloud, AWS could benefit even if their AI adoption takes longer than expected. Not all that spending will go to Amazon, of course, but it gives the company another source of potential growth.
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The $220 Billion Question
Amazon’s capital spending plan for 2026 is around $220 billion, up from roughly $200 billion, partly because memory costs have increased. Management has laid out its reasoning for the investment. Data centers take years to build but can remain useful for more than 30 years. Servers and networking equipment have much shorter lives, yet management expects them to break even in just under three years and remain useful for five to six years. It has also said that most AI capacity is being contracted for at least five years.
If those assumptions hold, Amazon should have several years to generate returns after recovering the initial cost of its equipment. But that outcome depends on how fully the infrastructure is used, what customers pay, and how quickly newer chips make existing equipment less competitive. Longer-term contracts provide some visibility, but they do not eliminate those risks. Rising memory and storage costs could also squeeze returns, particularly on existing contracts where pricing is already set. Management has acknowledged that debt is one possible source of funding, making free cash flow and the balance sheet important things to watch.
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Retail Still Has to Deliver
Amazon’s established retail business has growth opportunities of its own. Faster delivery and a wider selection of groceries could encourage customers to shop more frequently, while warehouse automation could help control costs. The other side of the equation is that fuel and long-distance transportation costs are rising. Amazon needs to make deliveries faster and attract more orders without allowing the cost of serving customers to rise just as quickly.
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Valuation: Cheaper Than Its History, but Not Without Risk
Amazon trades at about 20x trailing earnings and 24x expected earnings, which is well below its historical valuation. But the lower multiple needs some context. Its latest reported quarter included $53.4 billion in non-operating income, mostly from its Anthropic investment. That is very different from making money through AWS or retail, and the value of that investment could fall as well as rise. Without that gain, Amazon would look less cheap on a trailing earnings basis.
The forward P/E of 24x is a more useful starting point, though it still depends on earnings estimates and doesn’t tell the whole story. Amazon needs to keep investing heavily to grow its cloud, advertising, and logistics businesses, particularly as it ramps up spending on AI. At this valuation, the stock looks reasonable if those investments pay off and the businesses continue to grow. But if AI demand falls short or spending keeps climbing without a similar increase in cash flow, the shares could prove less attractive than they appear today.
Amazon is scheduled to report its third-quarter results on October 29. Investors will want to know whether management intends to increase spending again, how AWS demand is translating into cash flow, and how the company plans to fund its investments. The comparison with the prior year also needs some care because Prime Day moved into the second quarter this year. Management warned that this shift would weigh on reported third-quarter year-over-year sales growth by roughly 400 basis points.
Amazon has earned its reputation as a strong capital allocator by turning earlier investments into valuable businesses. That track record is a reason to take its latest spending seriously, but it does not guarantee another success on the same scale. At today’s valuation, the opportunity is there. The real test is whether the returns live up to the ambition.
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Market Sentiment
Amazon was held by 369 hedge funds with a combined stake value of about $97.10 billion at the end of Q2 2026 per Insider Monkey database. This is up from 353 hedge fund holders with a cumulative investment value of around $77.61 billion in Q1.
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This article is originally published at Insider Monkey.
