Amazon's Unfreezing of Free Cash Flow and Profit Margins Decreasing - Is AMZN Overpriced?
Amazon's second-quarter results for 2025 have been released, showing a 13% year-over-year increase in revenue to $167.7 billion. However, the tech giant's aggressive capital expenditures (CapEx) have raised concerns about the sustainability of profits and the stock's valuation.
Despite the revenue growth, Amazon's CapEx surged to $31.4 billion in Q2, causing a significant drop in free cash flow (FCF) from $52.7 billion last year to $18.2 billion. This decline in FCF and FCF margin from 8.73% to just 2.7% has raised questions about whether the current stock price adequately reflects these cash flow pressures.
Heavy investment in AI infrastructure, data centers, and GPU procurement has driven this increase in CapEx. This investment strategy, while promising for the long-term growth of Amazon's cloud computing, advertising, and AI sectors, is putting pressure on the company's near-term cash flow.
AWS, Amazon’s most profitable segment, also showed a sequential decline in operating profit margins, which dampened overall profitability and hurt investor sentiment despite strong revenue performance. Mixed guidance, with revenue outlook strong but profitability expectations lighter, has also contributed to market caution.
Despite these concerns, some analysts, such as Morningstar, remain positive about Amazon’s wide economic moat and have raised fair value estimates modestly based on strong results. They acknowledge the mixed guidance and margin pressure but see potential for rebounding operating profits and free cash flow as investments mature and scale.
However, the stock's potential overvaluation reflects a market weighing strong revenue growth against declining free cash flow and margin compression driven by the company's heavy capital spending.
The Q2 results also showed an increase in CapEx spending to $102.95 billion, up from $87.978 billion in the previous quarter. This has led to a projected Operating Cash Flow (OCF) for the next 12 months of $131.5 billion, assuming an OCF margin of 18.0%. If Capex remains flat at $103 billion over the next 12 months, FCF could rise to $131.5 billion.
The TTM revenue for June 30, 2022, was $670 billion, an increase of +10.87% from the previous year. The TTM FCF for the same period was $18.2 billion, a significant drop from the previous quarter and the year before. If Amazon's OCF margin remains at 18.0% and Capex remains at $103 billion over the next 12 months, the estimated FCF could be $19 billion.
The estimated market cap if Amazon pays out 100% of its future FCF and has a 0.7% FCF yield is $2,714 billion. If Amazon has a 1.0% FCF yield, the estimated market cap would be $1,900 billion.
The projected AMZN target price range over the next 12 months is between $179.00 and $255.65, with an average of $217.33.
In conclusion, while Amazon's Q2 results show strong revenue growth, the company's heavy capital expenditures have led to concerns about the sustainability of profits and the stock's valuation. Analysts are projecting Amazon's revenue for the next 12 months to be between $696.44 billion and $764.97 billion, with FCF potentially rising if Capex remains flat. The stock's potential overvaluation reflects a market weighing strong revenue growth against declining free cash flow and margin compression driven by the company's heavy capital spending.
Investing in Amazon's stock may be questionable due to the significant drop in free cash flow, as the company's aggressive finance strategy involving large capital expenditures in business sectors like AI infrastructure, data centers, and GPU procurement has put pressure on near-term cash flow.
Amazon's heavy investments in its cloud computing, advertising, and AI sectors, demonstrated by the surge in capital expenditures, are promising for long-term business growth, but it has raised concerns about the sustainability of profits and the stock's valuation in the short term.
