Amazon’s 2026 Underperformance: A Bargain Opportunity?

Key Points

In a year when the AI trade surged, Amazon has lagged despite its strong business position. The stock (NASDAQ: AMZN) has underperformed while AI-driven companies rose. Recent hedge fund activity suggests market hesitation.

The company’s core operations are in excellent shape. AWS, its key profit driver, accelerated to 28% year-over-year growth in Q1 2026, reaching $37.6 billion. This marks the fastest growth in 15 quarters, signaling strong AI adoption.

AWS profitability remains exceptional, generating $14.2 billion in operating income with a 37.7% margin. This supports Amazon’s overall revenue growth of 17% to $181.5 billion and a record operating margin of 13.1%. North America and international segments both grew with healthy profits, while advertising continues to add value.

Amazon is also expanding its AI chip business, now generating over $20 billion annually with triple-digit growth. This diversification strengthens its AI position beyond cloud services.

Stock Challenges

The main drag is heavy capital spending. Amazon invested $44.2 billion in Q1 2026, primarily for AI infrastructure, up from $25 billion previously. This has nearly eliminated free cash flow, which dropped to $1.2 billion over the past year.

Investors are concerned about the lack of immediate returns. However, historical patterns suggest this spending could pay off long-term, similar to past investments in AWS and logistics. The current valuation at 29x earnings appears reasonable given the growth trajectory.

While not a “screaming” bargain, the stock’s fundamentals and strategic investments make it attractive for patient investors. The key risk is the duration of the spending cycle, which may suppress cash flow further.

Conclusion

Amazon’s underperformance contrasts with its robust business fundamentals. The market’s caution may present an opportunity for those willing to accept near-term volatility for long-term growth. The combination of AI leadership, profitable scale, and strategic reinvestment supports a positive outlook.

Image source: Getty Images.

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