Amazon's Hidden Strengths Make It a Buy Despite Stock Slump

Amazon's stock performance may be underwhelming, but its underlying business is thriving. The company's Amazon Web Services (AWS) unit posted its fastest growth in 18 quarters, with a 37% year-over-year increase in Q2 revenue to $42.23 billion. This growth has led analysts to believe that AWS can reach annual revenues of over $1 trillion.

Amazon's advertising business is also performing well, with a 26% year-over-year increase in ad revenue to $19.81 billion in Q2. This high-margin stream adds to the company's operating income, which grew 43.24% year over year in Q2.

The balance sheet is another key factor in Amazon's favor, with a debt-to-equity ratio of 0.37 and an interest coverage ratio of 35.17 times. This allows the company to absorb the capital expenditure cycle without significant strain.

Despite these positive factors, analysts are cautious about Amazon's capex bill, which is planned at $200 billion for 2026. If AI demand softens before data centers can be monetized, free cash flow could remain under pressure.

Amazon's unique setup, including its AWS unit and custom-silicon economics, sets it apart from competitors like Microsoft and Alphabet. The company's ownership of Prime Video, Zoox, and other assets adds to its value proposition.