The Biggest Mistake Investors Make When Buying Amazon Stock

Group 1: Company Performance - Amazon's stock experienced a nearly 10% sell-off following the release of its second-quarter 2025 results, although it has since recovered slightly, remaining underperforming compared to the S&P 500 and Nasdaq Composite [1] - The company reported strong quarterly results with operating income growing faster than revenue, but its third-quarter guidance indicates a potential slowdown in growth, particularly in Amazon Web Services (AWS) [2][3] - Free cash flow dropped significantly to $18.2 billion for the trailing 12 months ended June 30, 2025, down from $53 billion for the same period in 2024, as the company invests heavily in various initiatives [3] Group 2: Capital Allocation Strategy - Amazon's strategy involves reinvesting profits into innovative projects rather than focusing on short-term profits, which can lead to inconsistent earnings and cash flow [4] - The company has not engaged in stock buybacks for years and its stock-based compensation exceeds $20 billion for the trailing 12 months, resulting in dilution of existing shareholders [5][7] - Unlike other tech giants, Amazon's approach does not offset stock-based compensation with buybacks, which could enhance earnings growth by reducing the number of outstanding shares [7] Group 3: Market Position and Valuation - AWS remains a leader in the global cloud market, and Amazon is reinvesting profits to expand its capacity and enhance its AI capabilities, although investors are keen to see these investments yield results [10] - Amazon's valuation has become more attractive, with a forward price-to-earnings (P/E) ratio of 33.9, comparable to Microsoft's 33.6 [11] - Investors must approach Amazon stock with a high risk tolerance due to its volatile nature and the potential for continued stock price declines if investments do not pay off [12][13] Group 4: Investment Considerations - For investors seeking a balanced capital allocation strategy, companies like Microsoft or Alphabet may be preferred over Amazon, although Amazon presents a decent valuation for those confident in its core e-commerce and advertising strengths [14]