Is The Amazon Dip A One-time Buying Opportunity Or A Falling Knife?

It’s been an interesting start to the year for software stocks. Throughout January, several fast-growing software developers, namely major cloud service providers, continued to demonstrate strong momentum, driven by continued demand for artificial intelligence (AI).

However, this dynamic has changed rapidly in recent weeks. The irony is that the culprit behind the software stock sell-off is… AI. So far in 2026, the shares of Amazon (NASDAQ: AMZN) have fallen by 11%. However, in February the decline was even more pronounced: shares fell by about 15%.

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Let’s take a look at why Amazon has become a laggard during the ‘SaaSpocalypse’ and assess whether this is an opportunity for smart investors to buy the dip or run for the hills.

Image source: Getty Images.

Earlier this month, Amazon reported earnings for the fourth quarter and full year 2025. The company’s e-commerce segment posted impressive results thanks to resilient consumer spending during the holiday season.

Additionally, Amazon Web Services (AWS) surprised everyone with a much-needed re-acceleration in revenue as competition heats up in the cloud wars against Microsoft Azure and Google Cloud Platform (GCP).

Nevertheless, Wall Street found a reason to sell Amazon stock despite the company’s robust operating results. The reason? Because management has targeted an annual spend of up to $200 billion in capital expenditures (capex) this year. This was well above analysts’ expectations of around $150 billion in capital investments.

The driving forces behind Amazon’s increasing capital investments all have to do with AI. The company builds data centers, designs its own custom training and inference chips, builds low-orbit satellites, and makes strategic investments in generative AI developers (more on that later).

In 2025, Amazon’s revenue rose 12% year over year to $717 billion, while earnings per share (EPS) rose about 30%. While this looks solid, Wall Street is starting to worry about Amazon’s cash flow profile.

Last year, Amazon’s free cash flow fell by a whopping 71% over the last twelve months, from $38.2 billion in 2024 to just $11.2 billion at the end of 2025. According to management commentary, the main catalyst behind this decline was its continued investment in AI.

As the above trends indicate, Amazon’s excess cash flow is slowing at a much faster pace than the company’s profitability growth. Against this backdrop, Wall Street increasingly views Amazon’s capital expenditures as a potentially irresponsible use of capital allocation.

Shortly after Microsoft made an investment in OpenAI in early 2023, Amazon followed suit with its own investment in a competing platform called Anthropic. Anthropic is developing a large language model (LLM) called Claude, which competes heavily with ChatGPT.

In recent years, Anthropic has become tightly integrated into AWS. Anthropic has trained its generative AI models using Amazon’s custom Trainium and Inferentia chips, and has helped expand next-generation products within the AWS ecosystem, such as Amazon Bedrock.

Since hyperscalers like Microsoft, Amazon and Alphabet integrated LLMs in their cloud services are increasing revenue and business income growth. The caveat is that this growth took some time to manifest.

During the fourth quarter, AWS reported revenue of $35.6 billion, bringing this segment of Amazon’s business to $142 billion in annual revenue. Indeed, AWS’s 24% year-over-year growth was the highest in more than three years.

While AWS’s growth hasn’t outpaced that of Amazon’s rising capital budget, the company has proven it can profitably monetize AI in a meaningful way. In my view, generative AI represented phase one of the AI revolution. Now big tech is moving toward building out infrastructure as the next frontier that will give birth to next-generation services in robotics, autonomous systems, agentic AI and more.

While Amazon’s free cash flow will almost certainly continue to decline in the short term, the AI-powered results of the company’s continued infrastructure investments should far outweigh these concerns in the long term. Yet investors just can’t seem to look at the bigger picture; hence Amazon’s stock is trading near its cheapest level in a decade, based on forward price-earnings (P/E) trends.

AMZN PE ratio (forward) chart — AMZN PE ratio (forward) data according to YCharts

While the company’s profitability profile may be under pressure for the time being, this momentum is expected to be relatively short-lived. As shares continue to fall, savvy investors understand that Amazon’s position in AI is solidly supported by the likes of Anthropic, making the company’s long-term prospects particularly attractive.

For these reasons, I now see an opportunity to buy the dip in Amazon stock.

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Adam Spatacco has positions at Alphabet, Amazon and Microsoft. The Motley Fool holds positions in and recommends Alphabet, Amazon and Microsoft. The Motley Fool has a disclosure policy.

Software bear market: Is the Amazon dip a once-in-a-decade buying opportunity or a falling knife? was originally published by The Motley Fool