Why Amazon Stock Rallied Monday Morning
Key Points
Amazon stock sold off last week after the company announced plans to increase its capex.
One Wall Street analyst believes the sell-off represents a compelling opportunity.
Amazon's valuation sits near an all-time low.
- 10 stocks we like better than Amazon ›
Shares of Amazon (NASDAQ:AMZN) rallied on Monday, adding as much as 5.6%. As of 11:52 a.m. ET, the stock was still up 4.6%.
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The catalyst that sent the e-commerce and cloud computing specialist higher was a vote of confidence from Wall Street after last week's slump.
Image source: The Motley Fool.
You gotta spend money to make money
Phillip Securities analyst Helena Wang upgraded Amazon stock to buy from accumulate (a step above hold), while raising her price target to $330 per share, up from $320. The analyst points to the company's "strong demand visibility" for its cloud services and its growing suite of artificial intelligence (AI) offerings.
Amazon stock dove last week when the company reported its Q3 results and reiterated its plans to increase its capital expenditures (capex) to $220 billion for 2026. Perhaps as importantly, CEO Andy Jassy said Amazon expects to spend "meaningfully more in 2027," to capitalize on the opportunity represented by AI. That pronouncement, combined with negative free cash flow of $42 billion, gave investors pause and sent the stock plunging.
Spending on AI continues to escalate with no end in sight, and some investors wonder if Amazon will be able to recoup that heavy spending with higher future revenue. Jassy addressed this on the earnings call and said the company has "even more conviction" than before that these investments in Amazon Web Services (AWS) and AI "will yield a much larger revenue and free cash flow-generating business."
We've seen this movie before. There have been numerous times in Amazon's past when the company spent heavily to capture an opportunity -- AWS, fulfillment, same-day delivery, etc. In each case, that spending resulted in higher revenue and a stronger business. I have no reason to believe this time will be any different.
And at 20 times earnings, Amazon's valuation sits near an all-time low, allowing savvy investors to profit from the sell-off.
That makes Amazon stock a buy.
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Danny Vena, CPA has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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