AMZN Analysis: The $132 Billion Capex Gamble — Why Amazon's 20% Selloff May Be Setting Up the Decade's Best Cash Flow Inflection
Key Takeaways
- Amazon generated $77.7 billion in net income in FY2025 — up 31% year-over-year — yet trades at just 28.8x trailing earnings, its cheapest valuation in over a decade.
- The $131.8 billion capex cycle compressed free cash flow to $7.7 billion in FY2025, but operating cash flow of $139.5 billion grew 20%, signaling the underlying business remains exceptionally strong.
- Berkshire Hathaway's 77% AMZN stake reduction appears tied to the Buffett-to-Abel leadership transition, not a fundamental indictment — the stock rose 2.6% on the disclosure.
- At roughly 11x estimated 2028 earnings of $18-19 per share, Amazon offers rare value for a company with three dominant business engines (AWS, advertising, e-commerce) all expanding margins simultaneously.
- The capex cycle is expected to peak in 2026 with free cash flow inflecting toward $40-50 billion by 2027 — making the current selloff a potential generational entry point for long-term investors.
Amazon.com, Inc. (NASDAQ: AMZN) trades at $206.33 as of February 18, 2026 — down roughly 20% from its 52-week high of $258.60 and sitting 10.5% below its 50-day moving average of $230.46. The $2.21 trillion company just reported its fiscal year 2025 results, posting $716.9 billion in annual revenue and $77.7 billion in net income, yet the stock finds itself in its deepest correction since the 2022 bear market. The culprit isn't earnings — those are accelerating — but the staggering $131.8 billion Amazon spent on capital expenditures last year, nearly 60% more than in 2024.
The market is pricing Amazon as if it's a mature retailer drowning in infrastructure costs. But beneath the surface, Amazon's operating income surged 46% year-over-year, AWS is scaling into the AI era with margins that would make most SaaS companies envious, and the advertising business is quietly approaching a $70 billion annual run rate. The Buffett headline — Berkshire Hathaway slashed its AMZN position by 77% in Q4 2025 — added near-term selling pressure, but this is a portfolio transition story at Berkshire, not a thesis-breaking signal about Amazon's fundamentals.
What makes this moment compelling for individual investors is the disconnect between Amazon's accelerating profitability and its compressed valuation. At 28.8x trailing earnings and 15.4x EV/EBITDA, Amazon hasn't been this accessible on a valuation basis since the post-pandemic recalibration. The question isn't whether Amazon is a great business — it's whether the massive capex cycle will ultimately yield the cash flow inflection that would make today's entry price look like a bargain.
Valuation: Cheapest in a Decade on Multiple Metrics
Amazon's current valuation tells a story of market skepticism colliding with fundamental strength. At a trailing PE of 28.8x, the stock is trading at a significant discount to its five-year average PE of roughly 55-60x and below the broader Magnificent Seven average. The EV/EBITDA multiple of 15.4x on a full-year 2025 basis represents one of the most attractive entry points for Amazon since the company achieved sustained profitability.
The price-to-book ratio stands at 6.0x, down from 8.0x a year ago, reflecting both the selloff in shares and the dramatic expansion of Amazon's equity base — total stockholders' equity grew from $286 billion at year-end 2024 to $411 billion at year-end 2025, a 44% increase driven by $77.7 billion in retained earnings. The price-to-sales ratio of 3.4x on a trailing twelve-month basis is historically low for a company generating nearly 19% ROE and growing revenue at double-digit rates.
Where the valuation picture gets nuanced is on free cash flow. Amazon generated only $7.7 billion in FCF in FY2025, down sharply from $32.9 billion in FY2024, as the capex surge to $131.8 billion consumed nearly all operating cash flow of $139.5 billion. This gives Amazon a price-to-FCF ratio above 300x — optically horrifying. But this is a deliberate investment cycle, not a structural cash flow impairment. Operating cash flow grew 20.4% year-over-year to $139.5 billion, and as capex intensity normalizes from the current 18.4% of revenue, FCF should inflect dramatically.
AMZN Valuation Multiples: Then vs. Now
Compared to mega-cap tech peers, Amazon's 28.8x PE sits below Microsoft (roughly 32x), Apple (roughly 30x), and in line with Alphabet. But Amazon arguably has more earnings upside given its earlier position in the margin expansion curve — operating margins expanded from 6.4% in FY2023 to 11.2% in FY2025, and the trajectory remains upward.
Earnings Performance: A Profit Machine in Disguise
Amazon's FY2025 earnings performance demolished the narrative that it is merely a revenue growth story. Full-year net income reached $77.7 billion — a 31% increase over FY2024's $59.2 billion and more than 2.5x FY2023's $30.4 billion. Diluted EPS for the full year came in at approximately $7.17, representing a remarkable profit acceleration.
The quarterly trajectory reveals consistent execution. Q1 2025 delivered $155.7 billion in revenue with $1.59 diluted EPS. Q2 stepped up to $167.7 billion and $1.68 EPS. Q3 saw $180.2 billion and $1.95 EPS. Q4 capped the year with $213.4 billion in revenue — a holiday quarter record — and $1.95 diluted EPS. Revenue grew 11% year-over-year on a full-year basis, accelerating from 12% in Q1 to 11% in Q4 on a massive base.
AMZN Quarterly Revenue and Net Income (FY2025)
Gross margins improved steadily, from 50.6% in Q1 to 48.5% in Q4 (the slight Q4 dip reflects seasonal mix toward lower-margin retail during the holidays). Operating margins ranged from 9.7% to 11.8% across the four quarters, a dramatic improvement from the 2-4% operating margins Amazon posted just three years ago. The net profit margin for the full year reached approximately 10.8%, marking the first time Amazon has sustained double-digit net margins across multiple quarters.
What's driving the margin expansion is the mix shift toward higher-margin businesses: AWS, advertising, and third-party seller services are all growing faster than the retail core. R&D spending as a percentage of revenue held steady at 13.8-16.1% quarterly, reflecting continued heavy investment in AI and infrastructure, yet operating leverage is still coming through decisively.
Financial Health: Fortress Balance Sheet, Capex Under the Microscope
Amazon's balance sheet as of December 31, 2025 reflects a company investing aggressively from a position of overwhelming financial strength. Total assets reached $818 billion, up from $643 billion just nine months earlier. Cash and short-term investments totaled $123 billion — a war chest that provides enormous strategic flexibility. Total debt stood at $153 billion (including capital lease obligations of $87.3 billion), yielding a debt-to-equity ratio of 0.37x, which is conservative for a company of Amazon's scale and cash generation.
Net debt to EBITDA is a comfortable 0.40x on a trailing twelve-month basis, down from 0.70x at year-end 2023. Interest coverage stands at a commanding 35.2x, meaning Amazon earns its annual interest expense more than 35 times over from operating income alone. The current ratio of 1.05x is tight but characteristic of Amazon's working capital model — the company operates with a negative cash conversion cycle of approximately -40 days, meaning it collects from customers and monetizes inventory faster than it pays suppliers.
The elephant in the room is capital expenditure. Amazon spent $131.8 billion in FY2025 on property, plant, and equipment — up 59% from $83 billion in FY2024. This spending is primarily directed at AWS data center expansion and AI infrastructure, with a meaningful portion supporting fulfillment and logistics capacity. As a result, annual free cash flow dropped from $32.9 billion in FY2024 to just $7.7 billion in FY2025.
AMZN Annual Cash Flow Trajectory ($B)
The critical question is whether this capex intensity is temporary or permanent. Management has signaled that the heaviest phase of AI infrastructure buildout will moderate into 2027, and multiple sell-side analysts project FCF inflecting back toward $40-50 billion by FY2027 as capex growth decelerates while operating cash flow continues compounding. The operating cash flow trend — growing from $46.8 billion in 2022 to $139.5 billion in 2025, a 3x increase — provides strong evidence that Amazon's underlying business economics remain exceptionally powerful.
Growth and Competitive Position: Three Engines, One Unassailable Moat
Amazon's competitive position rests on three distinct but synergistic business engines, each of which would be among the most valuable standalone companies in the world. The company recently surpassed Walmart to become the world's largest company by revenue, cementing its dominance across both digital and physical commerce.
AWS: The AI Infrastructure Standard. AWS remains the world's largest cloud infrastructure provider with an estimated 31-32% market share. The Q4 2025 results showed continued robust growth as enterprises migrate workloads to the cloud and — increasingly — deploy AI training and inference at scale. AWS's operating margins consistently exceed 30%, and the segment is Amazon's primary profit engine. The $131.8 billion capex cycle is overwhelmingly directed here, building GPU clusters, custom Trainium and Inferentia chips, and next-generation data center capacity. Amazon's Bedrock platform for foundation model deployment and the deepening partnership with Anthropic position AWS as the default infrastructure layer for enterprise AI adoption.
Advertising: The Quiet Profit Powerhouse. Amazon's advertising business has grown from a rounding error to what is now likely approaching a $65-70 billion annual run rate. With near-zero marginal costs (the traffic and data already exist from e-commerce), advertising revenue flows almost directly to the bottom line. This business alone contributes substantially to Amazon's margin expansion and is growing at 20%+ rates, outpacing Google and Meta's core ad businesses on a percentage basis.
E-Commerce and Logistics: Scale as Strategy. Amazon's retail operation generated over $350 billion in North American revenue in FY2025, supported by a logistics network that now rivals FedEx and UPS in scale. The company's investment in same-day and next-day delivery, regionalized fulfillment, and robotics-driven warehouses continues to widen the gap with competitors. Third-party seller services, which carry higher margins than first-party retail, now account for over 60% of total units sold on Amazon.
The key competitive risk is whether massive AI infrastructure spending by all major cloud providers (Microsoft, Google, Amazon) leads to a commoditized market where margins compress. But Amazon's vertically integrated approach — custom silicon, proprietary networking, and end-to-end managed services — provides structural cost advantages that are difficult to replicate.
Forward Outlook: Analysts See 40%+ Upside as Capex Cycle Peaks
Wall Street consensus remains decisively bullish on Amazon despite the recent correction. Analyst estimates project continued double-digit revenue growth, with consensus estimates pointing toward approximately $222 billion in Q1 2028 revenue, scaling to nearly $298 billion by Q4 2028 — implying annual revenues approaching the $1 trillion mark by the end of the decade. Consensus EPS estimates for 2028 suggest approximately $18-19 in annual earnings power, which would put Amazon at roughly 11x forward 2028 earnings at today's $206 price.
SeekingAlpha analysis published today set a price target of $296.69, implying 49% upside from current levels. The consensus view among sell-side analysts is that the capex cycle will peak in 2026 and begin moderating in 2027, at which point free cash flow should inflect sharply higher. If Amazon can return to generating $40-50 billion in annual FCF by 2027 — plausible given $139.5 billion in operating cash flow and moderating capex — the stock's current valuation looks deeply compelling.
Key catalysts to watch include: (1) AWS revenue acceleration as AI workloads scale, expected to become visible in mid-2026 earnings; (2) any indication from management that capex intensity is peaking, likely at the Q1 2026 earnings call on April 30, 2026; (3) continued margin expansion in North American retail and advertising; and (4) potential for share buybacks or capital return programs as FCF normalizes.
Risks are real and worth monitoring. Regulatory scrutiny of Amazon's marketplace practices continues across multiple jurisdictions. The Buffett exit — while likely portfolio-transition related — may signal that value-oriented investors see limited near-term upside at current capex levels. Macro weakness or a consumer spending slowdown would pressure the retail core. And if the AI infrastructure buildout fails to generate proportional returns, the market could punish Amazon's capital allocation severely. The next earnings report on April 30, 2026, will be a critical data point for assessing whether operating leverage can overcome the capex headwind.
The Buffett Signal: Noise or Warning?
The headline that dominated AMZN coverage today is Berkshire Hathaway's decision to slash its Amazon stake by 77% in Q4 2025, reducing the position from 10 million shares to approximately 2.28 million. Warren Buffett originally invested in Amazon in 2019 with roughly 536,000 shares at around $930 million. The position was expanded meaningfully over the years, making the recent sale — worth approximately $1.7 billion — Berkshire's most aggressive tech trim since it began reducing Apple in 2024.
Market reaction has been measured. AMZN rose 2.6% on the day, suggesting investors are reading this as portfolio housekeeping rather than a fundamental indictment. Several factors support this interpretation: Buffett formally stepped back as CEO of Berkshire in late 2025, and Greg Abel's incoming investment philosophy may differ on tech allocations. Berkshire simultaneously took a new position in The New York Times — hardly a signal that the conglomerate has soured on growth assets broadly.
That said, value investors should note that Buffett's sales have historically been well-timed. The 77% reduction is aggressive and came at significantly higher prices than today's — likely in the $220-250 range during Q4. Investors should acknowledge the signal without overreacting: Berkshire's remaining 2.28 million shares are worth roughly $470 million, a rounding error for a $1 trillion+ portfolio. The position was never a core Berkshire holding, and its reduction says more about Berkshire's evolving capital allocation under new leadership than about Amazon's intrinsic value.
Conclusion
Amazon at $206 represents a rare convergence: a dominant franchise at a reasonable price, temporarily obscured by a massive but deliberate investment cycle. The bull case is straightforward — operating cash flow is growing at 20%+ annually, margins are expanding across all three core businesses (AWS, advertising, e-commerce), and the $131.8 billion capex surge is building AI and cloud infrastructure that will generate returns for the next decade. If capex moderates as expected by 2027, free cash flow could return to $40-50 billion, making today's $2.2 trillion market cap look conservative.
The bear case centers on execution risk: what if the AI infrastructure buildout doesn't generate proportional revenue? What if cloud margins compress as hyperscalers compete away pricing power? What if consumer spending weakens and the retail core decelerates? These are legitimate concerns, but they argue for a lower multiple, not a fundamentally different thesis.
For individual investors, Amazon is a strong conviction buy below $210, with a fair value range of $250-280 based on normalized FCF estimates and historical EV/EBITDA ranges. Investors with a 2-3 year horizon should view the current correction as an opportunity to own one of the world's best businesses at a valuation that prices in meaningful risk. The stock is best suited for growth-oriented portfolios willing to tolerate near-term FCF compression in exchange for long-term compounding power. At 11x estimated 2028 earnings, Amazon offers a rare combination of quality and value that the market may not offer again soon.
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Sources & References
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Disclaimer: This content is AI-generated for informational purposes only and does not constitute financial advice. Consult qualified professionals before making investment decisions.