Amazon Shares Sink on Outlook. Is This a Buying Opportunity in the Stock?

Shares of Amazon (AMZN 1.74%) slipped as investors were disappointed with the company's first-quarter revenue forecast. However, the company remains very upbeat about its opportunities in artificial intelligence (AI), calling it a once-in-a-lifetime opportunity and the biggest technological shift since the advent of the internet. Amazon' stock is still up about 35% over the past year, as of this writing.

Let's dive into the company's fourth-quarter results and guidance to see if this is a good opportunity to buy the stock on the dip.

Betting big on AI

Amazon made no qualms that it plans to continue to invest heavily in AI. It said it would spend around $100 billion in capital expenditures (capex) this year, most of which would go toward AI infrastructure. Meanwhile, it said AI inference costs coming down would just fuel more AI infrastructure spending.

For the quarter, its cloud computing segment, Amazon Web Services (AWS), grew revenue 19% to $28.8 billion, while the segment's operating income soared 47% from $7.2 billion to $10.6 billion. It said its Bedrock and SageMaker solutions continue to grow rapidly, as organizations leverage foundational models to build generative AI apps. It recently added its own foundational model to Bedrock called Nova, as well as the much publicized DeepSeek R1 models.

Amazon further touted the performance and advantages of its own custom AI chips. It said EC2 instances, which are virtual servers, with its custom chips are between 30% to 40% more price performant than GPU-powered instances. It said that Anthropic is currently building its new frontier models using its Trainium 2 chip, while Qualcomm and Adobe have been testing the chip. It is already looking to bring Trainium 3 chips to the market by year-end.

On the consumer side of its business, Amazon's North American sales jumped 10% to $115.6 billion, while international sales increased 8% to $43.4 billion. Operating income for its North American segment soared 43% to $5.7 billion, while its international segment posted operating income of $1.3 billion versus a $419 million loss a year ago.

Advertising services was once again strong, growing 18% to $17.3 billion. It said sponsored ads were doing well, while Prime Video ads are showing good early momentum. It highlighted its Amazon Marketing Cloud as a way it helps advertisers analyze data to produce better marketing campaigns. Subscription service revenue, meanwhile, rose 10% to $11.5 billion.

Third-party seller services revenue increased by 9% to $47.5 billion. Online store revenue rose by 8% to $75.6 billion, while physical stores, such as Whole Foods and Amazon Fresh, saw sales rise by 8% to $5.6 billion.

Overall, Amazon's revenue rose by 10% to $187.8 billion, which came in just ahead of the $187.3 billion analyst consensus, as compiled by LSEG. Adjusted earnings per share (EPS) surged 86% to $1.86 and came in well ahead of analyst expectations of $1.49.

Amazon produced $115.9 billion in operating cash flow on the year and $38.2 billion in free cash flow. As such, it is generating more than enough cash to fund its aggressive AI infrastructure buildout.

Amazon forecast Q1 revenue to be between $151 billion and $155.5 billion, representing 5% to 9% growth. It said last year's leap year would have a negative $1.5 billion impact, while foreign currency would be a $2.1 billion headwind. That was below the $158.5 billion in revenue that analysts were expecting. The company anticipates that operating income will range from $14 billion to $18 billion, compared with $15.3 billion a year ago.

Should investors buy the dip?

Amazon has never been afraid to spend big, and it is doing just that when it comes to building out its AI infrastructure. Meanwhile, the company should have a cost advantage given its development and use of custom AI chips. AWS is growing quickly, but like with much of the cloud computing industry, capacity constraints are holding back growth.

The company's e-commerce operations, meanwhile, continue to grow nicely despite its huge size. In addition, the company continues to improve efficiencies and see operating leverage in the business, while its higher-margin ad business continues to grow nicely. This is all leading Amazon's earnings to grow much faster than its revenue.

Turning to valuation, Amazon currently trades at a forward price-to-earnings (P/E) ratio of about 30 times 2025 analyst estimates. That's below where it has traded historically.

AMZN PE Ratio (Forward 1y) data by YCharts

While its Q1 guidance was on the soft side, I wouldn't bet against Amazon over the long term when it sees a generational opportunity in front of it. The company has a long history of going through investment cycles and coming out the other end a bigger and stronger company. I would expect this when it comes to AI and cloud computing.

As such, I think long-term investors can buy the dip in the stock.