Amazon: Stock to Avoid or Once-in-a-Decade Buying Opportunity?

Amazon (NASDAQ: AMZN) is part of our daily lives as we shop at this e-commerce giant for essentials and general merchandise -- and even turn to the company for its selection of books and movies. But the company's biggest profit driver isn't e-commerce. What drives profit at Amazon is the company's cloud computing business, Amazon Web Services (AWS).

Over time, AWS has built out a vast range of services for its customers and has become the world's biggest cloud service provider. And in recent years, this has allowed Amazon to become a key player in one of the highest-growth technologies around: artificial intelligence (AI). The company offers AI infrastructure as well as products and services through AWS, but to do this, it must invest significantly.

In fact, in the latest earnings report, delivered yesterday, Amazon said it would spend $200 billion across the company, but with a focus on AWS, to address demand. Following this news, the stock fell about 10% in pre-market trading. Is Amazon a stock to avoid at this time of significant spending? Or is it a once-in-a-decade buying opportunity?

Image source: Getty Images.

An e-commerce leader

First, let's zoom in for a closer look at Amazon. The company is a leader in e-commerce and maintains this position through its solid moat or competitive advantage. This moat is Amazon's vast network of fulfillment centers and delivery systems, as well as its Prime subscription service. It would be very difficult for a rival to copy this well-established empire.

In recent years, Amazon has made improvements to its business, shifting to a regional fulfillment system from a national one to bring inventory closer to the customer, for example. The company also has been using AI extensively to help customers shop and to make its operations more efficient. All of these efforts are meant to keep customers coming back and help Amazon lower its costs.

Meanwhile, AWS has been going strong, building out infrastructure to meet AI demand, developing its own AI chips and systems, such as Amazon Bedrock, and offering customers the most sought-after products, like Nvidia or Advanced Micro Devices chips.

AWS revenue tops estimates

All of this has driven earnings higher, and the current quarter isn't an exception. Though earnings per share, at $1.95, missed analysts' estimates of $1.97, overall revenue and AWS revenue topped estimates. Total revenue climbed to more than $213 billion, beating the $211 billion forecast, and AWS revenue reached more than $35 billion versus the estimate for more than $34 billion.

As mentioned, Amazon said it would spend about $200 billion across the company but would focus the spending on AWS to address demand. AWS delivered a 24% revenue gain in the quarter for its highest growth rate in 13 quarters. And that's helped the business reach a $142 billion annual revenue run rate. This is as customers rush to get in on AWS' core services as well as its AI offerings.

Though Amazon's earnings report looks generally strong, investors weren't pleased with the company's capital expenditure forecast.

Should you buy or avoid the stock?

Now, let's return to our question: In light of the spending to come, is Amazon a stock to avoid, or are we looking at a once-in-a-decade buying opportunity?

In recent months, investors have worried about the growing level of AI spending -- the concern is that companies will overbuild and then be left with too much capacity. So far, however, demand has supported this strategy to invest in infrastructure. Amazon and its fellow cloud players -- from giants like Microsoft to smaller AI specialists such as CoreWeave -- have delivered the same message to investors: Demand continues at extremely high levels quarter after quarter.

Of course, this doesn't eliminate the risk that demand could slow, even temporarily, at some point. But in the AI story, infrastructure is a key element, so if we believe this AI boom will continue, decisions to ramp up this infrastructure are likely to pay off.

It's also important to remember that Amazon is a well-established company that has managed various challenges in the past and, over time, has delivered a win to investors. That means that today, on the dip, it's not a stock to avoid. Instead, Amazon may be offering us a once-in-a-decade investment opportunity.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.