Amazon Valuation Puzzle: Earnings Cheaper Than Market, Cash Pricier

Amazon.com (AMZN) is an interesting stock to analyze when looking at its valuation multiples. On one hand, it trades at a lower price-to-earnings ratio compared to the S&P 500, with a multiple of 22.6 times earnings against 23.9 for the index. However, this lower P/E is somewhat flattered by a wide gap between net income and operating income, which was lifted by non-operating gains including Amazon's stake in Anthropic.

On the other hand, when looking at cash flow, Amazon becomes pricier compared to the market, with an 18.7 times operating cash flow multiple against 15.7 for the index. The free cash flow is even negative over the trailing twelve months.

The company's heavy investment in cloud infrastructure, particularly through its AWS segment, is a major contributor to this negative free cash flow. Management expects about $220 billion of cash capital spending in 2026, up from an earlier estimate of roughly $200 billion due to increased memory costs. This spending supports AI and AWS growth.

AWS revenue grew 37% year over year in the quarter ended in June, marking a fifth consecutive quarter of acceleration. The company has a large backlog of $496 billion, which provides a foundation for future growth. Despite the negative free cash flow, Amazon's revenue has grown 13.0% annually over the past three years against 5.7% for the index.