Amazon's massive investment in artificial intelligence leads to its stock experiencing the steepest monthly decline in years

Amazon's AI Investments Spark Investor Concerns

Although Amazon.com Inc. stands at the forefront of artificial intelligence innovation, shareholders are growing wary of the mounting expenses required to sustain its leadership. In February, Amazon's stock dropped by 12%, marking its steepest monthly decline since late 2022. This downturn reflects Wall Street's skepticism toward the company's ambitious AI-related capital spending, which is eroding free cash flow and leaving investors anxious about when these investments will deliver substantial returns.

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Last month, Amazon was the weakest performer among the Magnificent Seven tech giants and ranked among the bottom 40 companies in the S&P 500. This follows a modest 5.2% gain in 2025, which was also the lowest among its peers.

"Amazon is becoming a cautionary example, with massive investments but comparatively low returns in the tech sector," commented Adam Rich, deputy chief investment officer at Vaughan Nelson Investment Management. "The current growth doesn't justify the increased capital expenditures."

On Monday, Amazon's shares fell up to 3.3% in premarket trading, part of a broader market selloff triggered by military actions in the Middle East.

Major AI Deals and Spending

Amazon announced a $50 billion investment in OpenAI on Friday. Under their agreement, OpenAI will spend an additional $100 billion over the next eight years with Amazon Web Services. This comes after Amazon's early February earnings report revealed plans to allocate $200 billion this year for data centers, chips, and infrastructure to boost computing power—far exceeding expectations and resulting in a disappointing operating income forecast, despite AWS's fastest quarterly growth in over three years.

Due to these expenditures, Amazon is projected to have negative free cash flow of $524.2 million in 2026, marking its first deficit since 2022. In contrast, the company reported $7.7 billion in free cash flow for 2025.

Amazon isn't alone in facing scrutiny over spending. Microsoft saw its shares drop after announcing increased capital expenditures, and CoreWeave Inc. experienced a 19% plunge on Friday following higher-than-anticipated spending and losses.

Amazon's Valuation and Investor Sentiment

The recent selloff has made Amazon's shares appear undervalued, trading at about 22 times projected earnings—less than half its 20-year average of 50. The stock is at its largest discount compared to the Nasdaq 100 Index, and is priced well below Walmart Inc., which trades at a multiple above 43, even as Amazon recently surpassed Walmart as the world's top revenue-generating retailer.

Investor attitudes toward AI spending have shifted, with increased capital expenditures now seen as a risk rather than a bullish sign. Amazon's return on invested capital (ROIC) dropped to 12.4% in the fourth quarter, down from 14.8% two quarters earlier, its highest since 2011.

"The stock looks oversold based on its multiple, but ROIC is trending downward, and as long as that continues, the market won't reward it," said Rich, whose firm holds Amazon shares. "I'm weighing both perspectives."

Reasons for Optimism

Despite recent setbacks, many analysts believe Amazon's spending will drive future growth. William Blair analyst Dylan Carden noted that the OpenAI deal gives context to the $200 billion capex announcement, as AWS expands to support major clients. Supporters point to Amazon's strong AI position, including the use of its Trainium chips in the OpenAI deal, its investment in Anthropic, and its extensive use of robotics to enhance warehouse and logistics efficiency.

Amazon remains a favorite among Wall Street analysts: out of 83 covering the company, 78 rate it a buy, five recommend holding, and none suggest selling. The average 12-month price target is $282.65, implying a 35% upside from Friday's close.

"Among the Magnificent Seven, Amazon is arguably the most attractive stock opportunity," said Andrew Choi, portfolio manager at Parnassus Investments. "It's expanding rapidly, has a low valuation, and while it's in an investment phase, it can scale back if needed and see cash flow recover. No matter how you analyze it, Amazon stands out."

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