Amazon (AMZN) Stock May Be 44% Undervalued As AI Deal Talks Emerge

Amazon.com has delivered a powerful 3 year share price run, and with the stock last closing at US$254.08, the live question is whether the cash the business can generate is enough to justify where it trades today. Recent headlines around artificial intelligence, job cuts and legal settlements add fresh moving parts to that cash flow story rather than settling it.

• Over the past 3 years the stock has returned 98.3%, which puts a lot of weight on the idea that future cash flows can support a much higher equity value than in the past.
• Reports that Amazon is in talks to acquire AI startup Decart for about US$7b highlight how heavily the group may invest to strengthen its chip and cloud position, which can influence both long term growth potential and near term cash requirements.
• What if you looked at Amazon.com through its earnings instead? See what Amazon.com's 20.3x P/E says about the price.

The issue now is whether the current share price can be squared with the intrinsic value estimate that comes from modelling Amazon's cash flows with a Discounted Cash Flow (DCF) approach.

If you are weighing Amazon.com against other plays on AI infrastructure and cash flow, it can help to compare it with a wider group of 92 AI infrastructure stocks.

Is Amazon.com a Bargain on Cash Flow?

The Discounted Cash Flow (DCF) model here projects what Amazon.com could return to shareholders based on future free cash flows rather than near term earnings swings. Latest twelve month free cash flow sits at about US$32.6b, so the framework starts from a sizeable cash engine rather than a turnaround story.

Analysts feeding into this DCF expect free cash flow to be growing over the coming years, with projections that move from a near term dip in one forecast year to much larger positive figures later in the decade. That pattern fits a business leaning into heavy AI and data center spend today, which can pull cash out in the short run while aiming to support higher flows later. The model output suggests those future cash streams, once discounted back, imply an intrinsic value substantially above the current US$254.08 share price. Reports that Amazon is in talks to buy Decart for about US$7b help explain why the market still questions how much near term investment it will take to realise that cash flow path. Find out what Amazon.com could be worth using our Discounted Cash Flow (DCF) estimate.

The Amazon.com Narrative: What Would Justify Today's Price?

Simply Wall St Narratives for Amazon.com pick up where the DCF puzzle leaves off and explain which paths for revenue growth, profitability and earnings would need to hold for the stock to be worth meaningfully more or less than the current share price. All of this is housed on the Community page. Each narrative links a specific mix of potential catalysts and risks to its own estimate of fair value so you can track over time which version of Amazon.com's story is actually unfolding.

Community views on Amazon.com split between an aggressive AI payoff story and a more cautious read on what current valuations already assume.

Bull case: 44% undervalued

"Amazon is sacrificing short-term margins to secure long-duration dominance in AI infrastructure, advertising, and automated commerce..."

Discover why this Narrative puts Amazon.com at 44% undervalued.

Bear case: 51% overvalued

"Overall it seems Amazon is overvalued or at least a little overvalued at the current price..."

Explore why this Narrative puts Amazon.com at 51% overvalued.

One more piece of the Amazon.com puzzle before you move on

Cash flows and scenarios tell only part of the story, because the people steering Amazon.com and the way their pay is structured can heavily shape how those cash engines are used over time. See who runs Amazon.com and how they are paid.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com