Amazon’s Stock Lags the Market Despite Strong Fundamentals

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Amazon's performance in 2025 has proven a letdown for shareholders who anticipated more. With a gain of just under 6% since the start of the year, the company's shares have become the worst performer among the so-called Magnificent Seven. This stagnation is particularly stark against the backdrop of the S&P 500's 17% advance. The disconnect is puzzling, given that the underlying business shows robust growth: its AWS cloud division is accelerating, advertising revenue is surging, and Wall Street analysts maintain their bullish ratings. So what exactly is going wrong?

Market experts continue to express strong faith in Amazon's prospects. Of the analyst recommendations tracked, 44 advocate buying the stock, with only a single hold rating. The median price target sits at $296, implying a potential 27% upside from current levels. In December, BMO Capital raised its target to $304, while J.P. Morgan's stands at $305. Evercore ISI has even named Amazon its top pick for 2026.

However, the valuation leaves little room for error. Trading at a price-to-earnings ratio of nearly 33 based on trailing twelve-month earnings, any deviation from its expected growth trajectory carries significant risk. The company's pivotal transformation into an AI-driven cloud and commerce giant must succeed, all while defending its market share on multiple fronts.

Cloud Growth Faces Intensifying Rivalry

At the heart of Amazon's investment thesis is Amazon Web Services (AWS). In Q3 2025, the cloud unit expanded by 20% to $33 billion, marking its strongest growth since 2022. AWS contributes over 65% of operating profit and, with a 29% market share, retains its leadership position.

The concern for investors stems from competitive dynamics. Microsoft's Azure is growing at 40% and Google Cloud at 34%, both outpacing AWS. While Amazon's absolute lead isn't immediately threatened, it is conceding market share, a trend the market has not rewarded.

In response, Amazon is mounting a counteroffensive. The company has outlined capital expenditures of $125 billion for 2026, primarily dedicated to AI infrastructure. Its new Trainium3 processors are designed to be four times faster than their predecessors. Analysts project AWS growth could re-accelerate to 30% in 2026, fueled by a substantial backlog of orders worth $200 billion.

Aggressive Investment Weighs on Cash Generation

This ambitious spending plan is leaving a clear imprint on the company's financials. Free cash flow declined to $14.8 billion in the third quarter, a notable drop from the $47.7 billion reported a year earlier. Spending on property and equipment surged by nearly $51 billion. This financial pressure reflects the massive capacity expansion intended to position Amazon for the AI era.

Efficiency Gains Through Automation

Concurrently, Amazon is waging a major efficiency campaign. By July 2025, it had deployed one million robots across its warehouse network. AI-powered quality control systems are being rolled out extensively. Internal documents point to projected annual savings of $7.5 billion by 2027, linked to the reduction of approximately 50,000 manual roles.

In a separate move, CEO Andy Jassy announced 14,000 job cuts in corporate offices in October, citing cultural rather than financial reasons for the restructuring.

E-Commerce and Advertising: A Mixed Picture

In its core e-commerce business, competitive pressure is mounting. Walmart is gaining online market share, while Temu and Shein attract budget-conscious shoppers. Amazon's countermeasures include the launch of its "Haul" discount platform and private-label products priced under $5.

The advertising segment, however, provides a bright spot. Third-quarter revenue of $17.7 billion represents a 24% year-over-year increase. Partnerships with Netflix, Spotify, and Sirius XM are extending its reach. The AI shopping assistant, Rufus, now serves 250 million customers and is reported to boost purchase completion rates by 60%.

The overarching challenge for Amazon is executing this complex, capital-intensive transition without further disappointing a market that expects it to keep pace with its tech peers.