Amazon Grew Revenue 20%. Here's the Only Reason I Can Think Of for Why Amazon Trades at Just 22 Times Forward Earnings.

The price action on Amazon (NASDAQ: AMZN) stock may leave investors scratching their heads. The 20% net sales growth is an improvement over 2025, when growth rates were barely above double digits.

However, despite an improved performance, its forward P/E ratio has fallen to just 22, a level that would have been unimaginable in Amazon's earlier years. Although we do not know for sure why it has become so cheap, one aspect of its financials may have made some investors hesitant to buy the stock.

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The likely reason Amazon's valuation is so low

The factor most likely making investors skittish about Amazon stock is its capital expenditures (capex).

In the report for the second quarter of 2026, Amazon announced that it would increase capex spending for the year to $220 billion, up from the $200 billion estimate in the prior quarter. The company said it needed additional funding to cover the cost of memory chips, whose prices shot up amid an unprecedented shortage.

This comes after Amazon spent almost $132 billion in 2025, and the strain on its balance sheet has begun to show. The company holds about $123 billion in liquidity, which investors might typically view as a sign of balance-sheet strength.

Still, free cash flow has fallen to -$7.6 billion over the trailing 12 months (TTM). This is down from the $18.2 billion in TTM free cash flow in the year-ago quarter, indicating that Amazon's spending has begun to strain its financials.

Due in part to those expenditures, long-term debt also increased by 96% over the previous year to almost $129 billion. Considering the change in its financial situation, investors might be questioning whether Amazon can recoup this massive investment in AI infrastructure.

Moreover, amid the aforementioned 22 forward P/E ratios, investors may overlook that Amazon also trades at a 22 trailing P/E ratio. This implies that earnings growth will struggle, which is probably not a reassuring sign for investors right now.

Nonetheless, Amazon stock hit a new all-time high following the Q2 earnings release. Also, accelerating net sales growth is a sign that it is recouping its investment, particularly given the 37% increase in its cloud computing arm, Amazon Web Services (AWS).

Furthermore, one could argue that Amazon's aforementioned negative free cash flow is actually strong, given the staggering level of capex spending. That could induce investors to see the 22 forward P/E ratio as an overreaction and convince them to add to their Amazon positions.

Amazon's stock going forward

Admittedly, Amazon's unprecedented capex spending has strained its balance sheet and turned its free cash flow negative. When also considering the added borrowing, it could cause Amazon significant financial pain if the company's investment in itself does not pay off. This heavy capex spending is the most likely explanation for its low valuation.

Fortunately, Amazon's net sales growth has accelerated, and the company's continued growth and high liquidity have long attracted investors to the stock. Those factors might be a compelling reason to buy the consumer discretionary stock at 22 times forward earnings.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.