For a long time, Amazon’s (AMZN) stock price has rarely been associated with the word “cheap.” The expansion of its e-commerce empire had long supported a trading landscape characterized by substantial premiums. Today, the tech giant is making an all-out bet on another frontier: cloud computing and artificial intelligence infrastructure. However, its ambitious capital expenditure plans have become a dampener on current market sentiment. In the tug-of-war between weak expectations and strong realities, a historic valuation trough appears to be emerging.
Amazon has hit a growth ceiling in its North American e-commerce market, with overall revenue growth slowing. Yet its cloud business unit, AWS, is gradually becoming the key determinant of its investment value. In the first quarter of this year, AWS contributed as much as 59% of the company’s operating profit, despite accounting for only 21% of its revenue—a testament to its far higher operating margins compared to e-commerce. More importantly, AWS led all of the company’s business segments with a growth rate of 28%, marking its best performance in nearly four years. However, the faster the growth, the greater the investment required. Chief Executive Officer Andy Jassy noted that to sustain this growth momentum, capital expenditures must rise in tandem. Amazon plans to invest a staggering $200 billion in data center construction by 2026, and a large number of customers are already queuing up to use the new capacity, which reduces the investment risk to some extent.
Given the distortion of net income caused by high capital expenditures, it is more reasonable to measure Amazon’s valuation using the ratio of stock price to operating cash flow—an indicator that does not factor in capital expenditures. From this perspective, Amazon’s stock price has fallen to relatively low levels not seen in nearly two decades, offering long-term investors a rare margin of safety.
Amazon’s recent $25 billion multi-tranche bond issuance has stirred significant waves in the investment-grade bond market. To free up funds for participation in the new bond subscription, investors have been selling existing bonds issued by hyperscale cloud service providers, including Amazon itself, Alphabet (GOOGL), Nvidia (NVDA), Meta (META), Oracle (ORCL), and SpaceX. This selling pressure caused related bond prices to broadly weaken on Tuesday, making the technology sector one of the weakest performers that day. Data shows that subscription demand for this issuance stood at approximately $62 billion, roughly half of what it was during the March financing round, indicating waning market enthusiasm for continued fundraising by the giants. In the secondary market, the spread on Amazon’s bonds maturing in 2046 widened by about 21 basis points, while the spread on Alphabet’s bonds maturing in 2066 widened by approximately 12 basis points.
Faced with the ever-expanding financing needs of tech giants for AI infrastructure, some large institutional investors have begun to show caution. Analysts at Janus Henderson Investors pointed out that the recent bond weakness is a short-term phenomenon driven by portfolio reallocation, rather than a deterioration in credit quality. However, given expectations of continued increases in future bond supply, the firm has maintained an underweight position on the technology sector and hyperscale cloud service providers, arguing that issuers will need to offer higher yields to absorb market capacity. Analysts at RBC Global Asset Management estimated that the new-issue concession would be around 10 to 15 basis points, also maintaining an underweight view. They believe that capital expenditures may continue to exceed expectations and drive more bond financing, potentially putting pressure on credit spreads. In contrast, the firm favors data center project finance bonds, which can offer higher spread compensation.
