$AMZN · Parkev Tatevosian, CFA · 2026-11-07

When Amazon announced its quarterly financial results, some worrying signs emerged. First, the growth of the advertising business slowed significantly from over 20% to less than 10%.

The management team stated that growth will likely accelerate in the next quarter, and that the slowdown is due to some differences in timing. Okay, we understand. We will overlook the issue of advertising work, as it is not the most important at the moment.

Secondly, another worrying indicator is the significantly negative free cash flow, which appears likely to continue this way for at least another two quarters, and possibly another two years. This is the biggest source of concern.

In general, the common denominator between these two problems, in my opinion, is their short-term nature. Things are likely to improve in the long run. I think Amazon will thrive in the advertising field.

It has hundreds of millions of customers who have their payment information registered, and the purchase process can be completed with one click. There is no doubt that Amazon is the closest to making a purchase decision.

This situation may change as proxy artificial intelligence develops in the future. I have some concerns about the sustainability of this development, but even so, they currently still have the strongest advertising offer for customers.

Free cash flow, however, is also short-term in nature. They are likely to spend heavily in this area over the next year, and possibly the next two years, and then starting in 2028, I expect their cash flow to improve as they reduce their capital expenditures.

So, having taken all of that into account, I want to share my opinion on Amazon, whether to buy, hold, or sell, and what my new estimate of fair value is.

I talked about the challenges in the introduction, but there were also many positive aspects in the Amazon report. First, their chip sector is booming, achieving annual growth exceeding one hundred percent, and revenues from their central processing units and graphics processors, known as Graviton and Trainium, have increased more than 20 times annually.

It could be argued that Amazon has the best chip of its kind among non-branded chip manufacturers, wouldn't you agree? Of these four, I believe that Amazon has the best and most advanced software.

Let's assume that the first and second positions are Amazon and Alphabet, and you can reverse them, but the businesses of both companies are very successful.

The demand for these chips is enormous. This is a new sector for Amazon, and it is expected to grow to more than $100 billion in annual revenue. It is already approaching $25 billion.

So, we received an update on capital expenditures. Amazon reaffirmed its 2026 estimate of $220 billion and shared its projections for 2027. Here's what it said: "We expect significantly more spending in 2027, with a clear vision for generating financial returns."

So, you might be wondering: what does "much bigger" mean? What is this number? How do we measure "much bigger"? Okay, I'll give you my opinion. When a company says "much bigger," to me that means at least a 20 % increase. correct?

Because if it were 10%, they would have simply said "much bigger". correct? They won't say "much bigger". correct? "Much larger" means a very large increase. 10% is a very small percentage. correct?

If prices change slightly, or there are some construction delays, or some timings vary, growth may remain steady if it is close to just 10% growth. correct? So, for me, meaningful growth is at least 20%, and it can go as high as 50%.

Good? It is not a weakness. correct? Because if it were going to double, they would have at least said so. Good? So, it is not a weakness. So, it is less than 440 billion, but it is more than 250 billion, and possibly more than 260 billion.

Therefore, my initial estimate for Amazon's capital expenditures for 2027 is between $275 billion and $350 billion. This is my initial estimate of what I think Amazon will spend based on what I hear from the Amazon management team, what I hear from the AI ecosystem in general, other companies, etc., demand, and all those influencing factors.

Other good news is Amazon's statement that AWS services are capable of growing by more than 40% in both 2027 and 2028, and of becoming a trillion-dollar revenue company within the next five to ten years.

This statement also affects my estimates of what I think they will spend next year, because if they see this kind of demand for this product, they will want to invest to provide the capacity to meet that demand.

The last thing Amazon wants to do is tell its customers: "Sorry, we're out of stock. Go to Alphabet or Microsoft and buy from them instead." This is the last thing they want. Therefore, they want to invest to ensure product availability so they can meet the needs of every customer who wants more.

One of the things that has impressed me about Amazon over the past five years or so is their ability to reduce the cost of customer service in an inflationary, indeed hyperinflationary, environment.

Costs have risen dramatically over the past five or six years, since the economy reopened. Costs have jumped in all areas where Amazon is struggling. We are talking here about the increased transportation costs due to higher fuel prices, and the increased shipping costs resulting from higher labor costs.

However, despite these challenges, Amazon was able to reduce the overall cost of serving its customers by improving inventory management, reducing shipping distances, and consolidating parcels.

This really impresses me, because despite these high costs, the company has managed to reduce the cost of serving its customers. I am very impressed with this achievement.

As a business expert, someone who is interested in operational processes and always strives to improve my processes and how I serve my customers, viewers and subscribers, the ability to achieve this improvement in customer service under these difficult economic conditions is truly impressive.

Therefore, I commend the management team for their ability to achieve these accomplishments.

This gives me greater confidence as an investor to invest in a company capable of achieving outstanding performance even under difficult circumstances, and this fills me with optimism.

Just imagine what it could achieve if things go its way! So, great work from the Amazon management team in this particular aspect.

I liked what I saw from Amazon in its latest quarterly update. I know that some investors were disappointed by some of the points I mentioned in the introduction, such as the slowdown in advertising revenue and negative free cash flows, and these are no doubt concerns, but for me, the positives outweighed the negatives.

Now, with Amazon's profits rising significantly and its share price not increasing, the company's valuation has become more attractive. The stock is trading at a forward price-to-earnings ratio of 22.7, which I consider a low valuation for a company that is achieving double-digit revenue growth and operating profitability growth that is at least double its revenue growth.

Its competitive advantages are also accelerating growth in its most profitable sector, with Amazon Web Services (AWS) expected to grow by 40% over the next two years.

Yes, I think this rating is very attractive. I also updated Amazon's discounted cash flow model for the next two years, and as a result, I revised the intrinsic value estimate.

I have reduced or lowered the amount of free cash flow that the company is expected to generate in 2026, 2027 and 2028. This means that 2026 and 2027 will be more negative, with losses increasing over the next two years.

As for 2028, it will be less positive, as I have lowered the estimate to $39 billion. However, I raised my estimate starting in 2029. If the company increases its spending on capital expenditures, I can expect a more positive free cash flow as it begins to reap the benefits of these investments.

Overall, this has raised my fair value estimate to $335. The current market price is $251. Therefore, my new valuation of Amazon stock appears to be 33% undervalued.

Before the start of the quarter, I had ranked Amazon among the top ten stocks you could buy right now, and after what I saw from the company, my optimism increased. I have confirmed my ranking among the top ten stocks, and I am completely confident in this ranking.

I own shares in Amazon within my investment portfolio, and they are among my largest investments. I would like to increase their size, and I wouldn't be surprised if I increased my stake in them before the end of the year.