A Pullback Despite a Strong Underlying Story
Amazon's shares have fallen more than 10% from the all-time high reached on May 5th, leaving the stock in correction territory. This decline followed a steady climb into the month of May, which itself was driven by earlier announcements at the start of the year detailing large capital expenditure plans for 2026. The key question is why a company with such a robust growth story would see its shares come off so sharply.
There appear to be two primary reasons behind the weakness, and notably, neither is fundamentally about the growth story itself.
Reason One: Portfolio Rebalancing
The first driver is portfolio rebalancing among money managers and portfolio managers. For several years, these investors have generally been overweight the "Magnificent 7" tech names, while holding little to no position in other technology companies. Names such as Intel and Micron have seen their shares explode in price over the past few months. As a result, investors have been reallocating capital — moving money out of the big spenders and into other parts of the market, particularly the "bottleneck" segments. This rebalancing means people are increasing positions outside of just the Mag 7, which mechanically pressures names like Amazon regardless of their fundamentals.
Reason Two: Digesting Enormous CapEx and New Leverage
The second driver is that the market is still digesting the scale of spending by the hyperscalers on AI infrastructure. Amazon is now expected to spend roughly $200 billion in capex this year. This figure is well above expectations: coming into the year, the estimate was somewhere in the range of $130 to $140 billion. When the figure was revealed at the start of 2026, it was effectively a "hold my beer, Google" moment, eclipsing even the aggressive spending plans of its rivals.
Compounding this concern is how the spending is being funded. Previously, the expectation was that these companies would invest using cash on hand. Now, however, Amazon is also tapping the bond and debt markets to fund its AI infrastructure buildout. This introduces leverage into the picture for the hyperscalers — a meaningful shift the market is still absorbing. Amazon is not alone in this behavior: Alphabet tapped the markets recently, and Nvidia is reportedly doing so as well. This raises a natural question — with so much free cash flow on hand, why do these companies need to raise additional money at all?
The Bull Case: A Margin Mix-Shift Story
The core investment thesis supporting a strong buy rating and a $325 price target is fairly simple: Amazon is fundamentally a mix-shift story.
This is a company generating nearly $800 billion in annual revenues. Its operating margins today sit around 12% — a striking figure when you consider that just two years ago, margins were roughly half that, around 6%. The argument is that the sky is the limit for Amazon's margins over the long term.
The reason for this optimism lies in the composition of Amazon's growth. Its fastest-growing businesses are also its most profitable businesses — namely AWS (cloud computing) and advertising. Meanwhile, its least profitable business, the retail operation, is also its slowest-growing segment. As the more profitable units grow faster than the low-margin retail business, the overall margin profile improves steadily.
Within the next five years or so, operating margins could climb closer to 20%, and potentially even higher over the longer term. When a company approaching $1 trillion in annual revenues expands margins on that scale, the effect trickles down into sizable EPS (earnings per share) growth.
The Three Pillars and the Underappreciated Bets
Analysts typically focus on three pillars of Amazon's growth: the retail business, the advertising business, and the AWS business. Most of the attention falls on AWS — and rightfully so, given its trajectory.
AWS Growth Trajectory
AWS grew 28% in the latest quarter, up from 24% the prior period. Within a year, growth is likely to reach the mid-30% range, and within a year and a half, it could exceed 40%, driven by the sheer volume of money being invested into that business. Expectations point to over 30% year-over-year growth as soon as the next quarter.
Advertising
The advertising business now generates roughly $70 billion on a trailing 12-month basis, representing another significant and highly profitable bright spot for the company.
The Overlooked "Other Bets"
Beyond the three pillars, several other ventures are being overlooked by the market and represent incremental upside not currently modeled by most sellside analysts:
- Grocery — a huge bet that Amazon is undertaking.
- Healthcare — another area where Amazon is placing significant wagers.
- Telecommunications via Amazon Leo — perhaps the most underappreciated piece. Amazon Leo is a direct competitor to Starlink. While much of the public conversation centers on SpaceX and Starlink, Amazon Leo is considered a formidable competitor, and the company is just getting started in that space.
The key point is that most sellside analysts are not modeling the growth potential of Amazon Leo, the grocery business, or the healthcare business at all. These represent areas that may be underpriced by the broader market, offering incremental upside to the stock above and beyond the well-understood AWS narrative.
A Bullish Options Trade Aligned with the Thesis
For traders who share the bullish outlook, a specific options strategy was outlined that takes advantage of currently low implied volatility. The implied volatility (IV) percentile ranks below 25%, meaning current levels sit in the bottom quarter of what has been seen over the past 12 months — making options relatively cheap.
The strategy is a bullish call vertical (a call debit spread) structured as follows:
- Timing: Amazon reports earnings at the end of July. This trade uses the July monthly options expiring on the 17th — 31 days to expiration — which deliberately avoids the earnings event while still capturing upside exposure into it.
- Structure: Buy the slightly in-the-money 245 strike call, and sell the 265 strike call against it. The 265 strike sits roughly one standard deviation away from the current price, which the options market is pricing at about plus or minus $19. This creates a $20-wide call vertical.
- Cost and risk: The trade costs roughly a $7.20 debit, which is the maximum risk — about $720 per contract — with a potential maximum gain of about $1,280.
- Break-even and required move: If the stock rises above 265, the break-even comes in around $250.20, only about 2% above the current share price. This means only a 2% gain over the 31 days is needed to reach profitability. The maximum gain occurs at the 265 level, requiring only about a 7.5% move upward.
The advantage of this structure is that selling the 265 call offsets some of the cost, so a large percentage move is not required to clear the break-even point. Although the position runs 31 days, it does not need to be held to expiration — all or a portion can be closed early if the desired upside move materializes and the position expands in price. This bullish call vertical aligns neatly with the $325 price target underpinning the broader bull case.
Market Backdrop
On the day in question, Amazon shares were trading higher amid a very mixed picture across the Mag Seven names and a split performance across the major indices. The Dow was testing 52,000, notching its fourth day of gains, while leaving the rest behind. Pressure was building for technology, with the Nasdaq 100 down nine-tenths of a percent and the S&P also under pressure.
