AMZN has bounced back, but AI spending has to count too
AMZN recovered Friday’s losses from Thursday, and I’m willing to bet it will continue to rebound over the first day or two of trading next week. Falling consumer confidence is certainly a concern for retail, but about 60% of the company’s operating profit comes from AWS. I think it’s a little premature to write off the whole company just because people may be less willing to spend.
AMZN rose 3.29% on Friday to close at $262.43, above Wednesday’s closing price of $259.92. Recovering those losses gives me a bit more confidence, though trading volume was about 10% lower than Thursday’s, so it’s still too early to say buyers have fully returned.
Last night, the preliminary University of Michigan consumer sentiment index for October fell from 48.1 to 46.3. The survey noted that consumers are increasingly dissatisfied with the cost of living. People may be more hesitant to shop, which could put pressure on Amazon’s retail business, but this survey alone doesn’t prove the company’s actual sales have declined.
AWS generated $16.6 billion in operating profit in the second quarter, out of $27.5 billion for the company as a whole. That’s about 60% of the total. AWS revenue was also up 37% year over year, and demand from businesses for cloud and AI services won’t necessarily move in lockstep with consumer spending. The results were reported back in July, so they reflect the company’s existing earnings base—not fresh good news from Friday.
But AI is costing money too. For the 12 months through June, Amazon’s free cash flow was negative $7.6 billion. The company said this was mainly due to increased investment in AI-related equipment. AWS’s profits look impressive, but we still need to see how much cash is left after investment. Profit growth alone may not be enough to put investors at ease.
If AMZN falls back toward $260 next week and keeps weakening, I’d start expecting a pullback. That level is near Wednesday’s close; falling back below it would mean the stock failed to hold on to its recovery. It’s not a level of support that’s guaranteed to hold.
AWS does give me confidence, but I’d also like to see the company retain more cash in its upcoming earnings reports. The more excitement there is around AI, the less I want the story to end with nothing but the money the company spent.
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