1 Oversold AI Stock to Buy Before It Rebounds

Amazon's (NASDAQ: AMZN) fourth-quarter report, released earlier this month, was strong. But shares sold off anyway as the company's expectation for about $200 billion in capital expenditures spooked investors. Shares of the e-commerce and cloud-computing giant have slid about 13% over the past month as investors have grown more cautious about the cost of building out AI (artificial intelligence) infrastructure.

But is the stock oversold? I think so.

Yes, Amazon's massive capital expenditures will likely weigh on earnings growth in the near term. But if there's one cloud computing company to bet on during a cloud-spending surge, it's the most scaled and proven one of them all: Amazon. Its cloud computing business, Amazon Web Services (AWS), is not new to cloud computing. In fact, it is the world's leading cloud computing provider -- and now its already massive cloud computing business is inflecting.

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AWS momentum is back

AI is positively impacting many parts of Amazon's business. But AWS is where the AI opportunity is most visible, as it's catalyzing a significant acceleration in the important Amazon business segment. Fourth-quarter AWS revenue rose 24% year over year to $35.6 billion, accelerating from 20% growth in the third quarter, when AWS revenue was $33.0 billion -- and that is an acceleration from Q2 levels.

Showing how Amazon is far more than just an e-commerce operation, AWS's operating income was $12.5 billion in Q4, which was half of Amazon's $25.0 billion total operating income for the period.

And in Amazon-fashion, the company is aggressive with pricing -- even in cloud computing. Amazon is also working to lower the cost of compute for customers and, in doing so, protect its own economics by building in-house alternatives to AI chipmaker Nvidia and, ultimately, better support its cloud computing business. In its earnings release, management said its Trainium and Graviton chips now have a combined annual revenue run rate of over $10 billion and are growing at a triple-digit year-over-year rate.

Further, it's not just Amazon's cloud computing arm that is doing well. Highlighting its overall strength, Amazon's consolidated business continues to grow at a healthy clip. Net sales rose 14% year over year in Q4 to $213.4 billion, up from 13% growth in Q3. And while the company's e-commerce business continues to do well, with online stores revenue increasing 10% year over year during Q4, advertising is another important Amazon business worth noting. Advertising services rose 23% year over year in the fourth quarter to $21.3 billion, adding another high-margin revenue stream alongside AWS.

But the spending is the part investors can't seem to get past lately.

A $200 billion spending plan

It's easy to see why some investors might be concerned about Amazon's big spending plans. Not only does Amazon expect its capital expenditures to ramp up going forward, but it's already weighing on the tech giant's cash flow.

For the trailing 12 months, Amazon said free cash flow fell to $11.2 billion from $38.2 billion a year earlier. Management said the decline was driven primarily by a $50.7 billion year-over-year increase in capital expenditures, net of proceeds from sales and incentives, and that the increase primarily reflects investments in AI.

And this is just the start.

"With such strong demand for our existing offerings and seminal opportunities like AI, chips, robotics, and low earth orbit satellites," CEO Andy Jassy said in the company's fourth-quarter earnings release, "we expect to invest about $200 billion in capital expenditures across Amazon in 2026, and anticipate strong long-term return on invested capital."

This leaves investors in a position where they need to bet on management's ability to deploy capital in a way that earns a good return on invested capital over the long haul. Because without a good return, big spending like this could negatively affect the company's long-term growth prospects in a material way.

In fact, investors are already seeing pressure on the company's profitability. Management guided for first-quarter net sales of $173.5 billion to $178.5 billion, implying about 13% year-over-year growth at the midpoint. But the midpoint of its operating income guidance implies only 3% year-over-year growth.

So, is Amazon stock a buy?

At about 29 times earnings, Amazon stock certainly isn't a bargain. At this price, investors are effectively betting that AWS stays on a strong growth track and that higher-margin lines like AWS and advertising grow as a percentage of sales over time. But I don't think this is an outlandish bet. Further, at any point, Amazon could always reduce its capital expenditure plans if it's not earning an attractive return on investment.

Of course, there are risks. For example, since the stock isn't necessarily in bargain territory, there's a possibility that the stock trades even lower if fears about the AI boom's sustainability lead to an even deeper tech stock sell-off

Ultimately, however, I like the stock as a good long-term bet from here. AWS is reaccelerating, and the business is producing enough operating income to fund a large build-out. With that said, for investors who do consider buying shares, it would be wise to consider this a high-risk investment and keep the position small. Not only is big spending risky, but cloud computing is a fast-changing business and intensely competitive.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.