Why's Amazon Suddenly Lagging the S&P 500, and Is It a Warning?

Key Points

• Amazon has fallen more than 10% since early May and is back trading at the same level it was at last October, while the S&P 500 has been setting new highs. 
• The divergence is driven by a growing tension between Amazon's AI infrastructure spending and the near-term pressure it is putting on its free cash flow.
• However, with AWS growth accelerating and several analysts assigning price targets well above $300, this recent underperformance may be creating a solid entry point. 

Amazon.com Inc NASDAQ: AMZN has had a difficult few weeks. The stock is trading right around $240, having been as high as $278 just a month ago, and is back to the level it traded at last October.

While the S&P 500 has quietly added around 2% over the same couple of weeks, Amazon has given back a meaningful chunk of the gains it logged during one of its strongest rallies in years. For a stock that spent much of April and May leading the market higher, that kind of divergence is stark.

The explanation, thankfully for the long-term bulls out there, isn’t so much about the business deteriorating.

It’s more about the market grappling with the ongoing tension at the heart of Amazon's current investment case: the company is spending at a scale that is compressing near-term free cash flow, and investors are debating whether that spending will deliver the returns the bulls are promising.

That debate is worth understanding in detail because how it plays out will determine whether the current pullback is a warning sign or a better buying opportunity for Amazon this year.

The CapEx Vs. Free Cash Flow Tension

Amazon's most recent quarterly results were, by most measures, very strong. Net sales rose 17% year over year, AWS grew 28%, and operating income was also strong. But one number stood out for the wrong reasons—the company’s free cash flow for the trailing 12 months fell sharply, to just $1.2 billion, as property and equipment costs, tied directly to Amazon’s scaling AI infrastructure, surged.

For a company of Amazon's scale, that figure is worryingly low, especially given that it was a 95% drop from the figure reported a year earlier. And while the stock had shrugged it off at the time and rallied to new highs after the report, it looks like this whole capital expenditure concern is finally catching up with it. It doesn’t help that broader market sentiment towards AI stocks has cooled markedly in recent weeks.

Amazon is committing enormous capital to the buildout of AI data centers, and the returns on that spending are not yet fully reflected in the financials. Investors who have been rewarding Amazon for its longstanding earnings power are now being asked to believe that the hundreds of billions being invested in infrastructure today will translate into blowout revenue and earnings tomorrow.

That’s not an unreasonable ask when you look at Amazon’s track record of delivering. Still, it is a bigger leap of faith than buying a company with rock-solid free cash flow. In a market that’s become increasingly sensitive to capital discipline, the optics are uncomfortable.

Why the Bull Case Remains Intact

However, the counter-argument is that Amazon's CapEx isn’t reckless spending; it’s a strategic investment to meet demonstrable demand. The company’s AWS unit, for example, grew 28% in the most recent quarter, a stunning acceleration for a business that’s already generating tens of billions in annual revenue.

Amazon’s pipeline of enterprise AI partnerships and commitments is also growing, offering genuine visibility into where future revenue will come from. In addition, the recently announced deal with optical fiber giant Corning is further proof that Amazon’s AI infrastructure buildout is not only real but gathering pace.

In that context, the current compression in the company’s free cash flow looks more like the necessary cost of investing to meet rising demand, rather than a symptom of demand failing to materialize.

What the Analysts Are Saying

Anyone who’s been concerned about the pullback in AMZN will be reassured to hear that the analyst community hasn’t been spooked by it. If anything, they’re using it as an opportunity to double down on their bullish outlook.

UBS just gave Amazon stock a fresh Buy rating and a $315 price target, while Jefferies and Citi both reiterated their Outperform ratings this month.

In fact, the growing list of analysts with price targets that are north of $300 is worth taking seriously. It suggests the market’s reaction in recent weeks has been overindexing on sinking free cash flow numbers and underindexing on the payoff around the corner.

As we head into the summer, this tension between CapEx and free cash flow is likely to continue. But the underlying business has rarely looked more strategically well-positioned, and the gap between where the stock is and where the analysts think it should be is increasingly difficult to ignore.