As a long-term investor, it is hard not to be wowed by how well Amazon (NASDAQ: AMZN) has done. Amazon stock’s five-year gain of 26% may not look like much to write home about, but since its 1997 listing, it has grown by 227,444%. Very few shares do that!
Lately, though, things have been less impressive. In fact, since the start of this year, Amazon stock is down by 11%.
That suggests that investors have become more downbeat on the business prospects for Amazon relative to its stock price. But, from a long-term perspective, does that make sense?
AI is imposing massive costs
As I see it, the big question here is about AI.
Setting up the infrastructure for AI on a grand scale is very expensive. We know this from a host of firms, such as Meta and Alphabet.
But Amazon is in a particularly vulnerable position when it comes to AI expenditure, as I see it. Not only does the retail platform need to adapt its business and spend on AI, but the AWS data centre business has to scale up massively for clients’ AI demand. That takes a lot of money.
When I say a lot, I mean a lot. Amazon expects capital expenditure of around $200bn this year.
Return on investment remains highly uncertain
That is across the business, so is not just funding AI. But still, it is a simply massive number – equivalent to around $24 for every man, woman, and child on the planet.
I think it is understandable that investors are fretting about what such vast expenditures might mean for Amazon’s profitability and balance sheet. After all, that $200bn is just for this year – there is likely to be further substantial spending in years to come.
Yet how transformative AI may be for Amazon remains to be seen. Nobody knows whether all that spending will ultimately turn out to be worth it.
Amazon’s a top class operator
The company says that it anticipates “strong long-term return on invested capital”.
Still, I think there is reasonable ground for scepticism about that. AI’s ultimate business value remains highly debatable.
What we do know, though, is that Amazon stock has soared over the decades because the company has a simply phenomenal track record of business performance.
With smart strategic planning, strong execution, and a focus on what is coming next, I would say Amazon has as much likelihood to succeed when it comes to AI as anyone.
Meanwhile, the existing business also continues to offer growth opportunities, both in markets where it is doing well and in others where it is still in the early stages of building its business.
Clearly, there are risks. But I believe Amazon stock, trading for 29 times earnings, could potentially be a bargain from a long-term perspective. I see it as one for investors to consider.
