Amazon Stock Sell-Off: Should You Buy the Dip?

What's better than a good sale on Amazon (AMZN -1.01%)? How about the company's stock being on sale?

Amazon has been caught in the recent market sell-off, with the e-commerce behemoth's shares down nearly 30% off its highs as of this writing.

Let's look at three reasons why investors should consider buying the dip.

The stock's cheapest valuation in years

Amazon's stock is not only off its highs, it is also trading at one of the cheapest valuations in its history. The stock currently has a trailing price-to-earnings (P/E) ratio of 31 and a forward P/E of 27.

To put that in perspective, over the past 10 years, Amazon has had an average trailing P/E of 137, and its three-year average is nearly 84. Some of this is due to periods of investments where earnings have turned negative. However, when it has been generating earnings, its trailing P/E has often been above 50 times.

AMZN PE Ratio (Forward) data by YCharts.

While the effect of tariffs creates some uncertainty and could affect its results, this is still a rare opportunity to buy Amazon's stock at a valuation this low. Don't let the short-term noise cloud the long-term opportunity in the stock.

Amazon thrives following investment periods

Amazon has never been shy about spending to invest and grow its business. This aggressive spending helped transform the company from an online book seller into the largest e-commerce marketplace and logistics company in the world.

It also helped it create the infrastructure-as-a-service model and become the largest cloud computing company on the planet.

During these investment periods, investors and analysts would often question its spending. However, this spending has always benefited the company and its shareholders over the long run, even while it may have hurt profits in the near term. Goldman Sachs analysts highlighted this trend in 2017, noting that during past large Amazon investment cycles, the stock outperformed after the company increased its capital expenditure (capex) budget.

Today, Amazon is investing big in artificial intelligence (AI) and the data center infrastructure needed to support it. In 2025, it plans to invest $100 billion in AI data centers to meet growing customer demand for AI workloads. Last year, it spent $83 billion in capex, including $27.8 billion in the fourth quarter.

In its annual letter to shareholders, Amazon called AI "a once-in-a-lifetime reinvention of everything we know," and said that "the demand is unlike anything we've seen before." It said that both its customers and shareholders will benefit from its aggressive spending. It also highlighted the long useful lives of its investments and the attractive long-term free cash flow and return on invested capital (ROIC) they generate.

Two market-leading businesses

With an investment in Amazon, investors are getting two market-leading businesses. The company remains the largest e-commerce and logistics company in the world. This business remains a solid low double-digit revenue growth business, but it's seeing strong operating leverage. This helped its combined North American and International segment operating income to soar 74% last quarter.

This operating leverage is being driven by a combination of AI and its higher-margin ad business. With AI, it's been able to create more efficient driver routes and use AI robots to identify damaged items before they ship, saving on the costs of returns. It's also using AI to help keep popular items in stock and to identify items that are commonly returned, alerting customers before they purchase them.

Meanwhile, the company has been seeing strong growth with its sponsored-ad business. Last quarter, its advertising services revenue climbed 18% to $17.3 billion, helped by its Amazon Marketing Cloud, which lets advertisers analyze data to create better marketing campaigns. The company has grown its advertising business to become the third-largest digital advertiser in the world.

Amazon's biggest business by profitability, though, is its Amazon Web Services (AWS) cloud computing business. It's also its fastest-growing business, growing revenue by 19% last quarter. AWS is benefiting from customers running their AI workloads on its platform. It's also seeing growth driven by its AI services, such as Bedrock and SageMaker, which can help customers develop their own AI models and apps. Bedrock provides foundation models that customers can use as a starting point, while SageMaker offers a more end-to-end solution.

Amazon has also developed its own custom AI chips through its Annapurna Labs subsidiary. These chips can provide better performance and consume less power than graphics processing units (GPUs), helping give Amazon a cost advantage.

While there could be some near-term disruption to its business from tariffs, these two market-leading businesses make Amazon a great long-term investment.