Amazon's Nvidia Bet Lifts AI Spending, But Valuation Risks Loom

Amazon's recent commitment to deploy 2 million additional Nvidia GPUs through 2027 and 2028 has brought renewed attention to its capital spending plans. This long-term AI infrastructure push is expected to boost Amazon's AI spending, which in turn may have a positive impact on the company's valuation.

The stock has seen significant gains recently, with a 1-month share price return of 17.55% and a year-to-date share price return of 17.63%. This suggests improving sentiment among investors. However, some analysts are warning that Amazon may face risks if AI infrastructure spending fails to earn adequate returns or if retail and AWS competition pressures margins.

The most popular narrative around Amazon's valuation suggests the stock is undervalued at its current price of $266.43. According to this view, a fair value estimate of $475.09 implies that Amazon is currently trading at a discount of over 45% below its true worth.

Another analysis by SWS DCF model points to a fair value of $431.07 for Amazon.com, indicating that the stock is priced below its cash flow-based estimate.