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Amazon reported better-than-expected second-quarter earnings on Thursday, and investors loved what they saw. Net sales rose 20%, and cloud revenue stood out as a particular bright spot. This combination of positive results was enough to send Amazon\u2019s stock up nearly 10% in after-hours trading.<\/p>\n
Crucially, Amazon isn\u2019t slowing down on data center spending, despite the conventional wisdom that investors want companies to rein it in. <\/p>\n
One line item, in particular, illustrates Amazon\u2019s appetite for investing in infrastructure. Amazon spent $173 billion for the fiscal year ended June 30 on property and equipment \u2014 a category that covers GPUs, natural gas turbines, and plots of land \u2014 up from $107.65 billion from the year before.<\/p>\n
It also raised its 2026 capex forecast from $200 billion to $220 billion \u2014 even as it has begun dipping into its cash reserves to help cover the cost. The company ended the quarter with $7.6 billion less cash than it had 12 months ago, marking its first period of negative free cash flow this year.<\/p>\n
Under normal circumstances, ballooning expenses would be a tough pill for investors to swallow. But Amazon has a revenue engine that helps justify the spending. AWS revenue rose 37% year over year, clocking $42 billion for the quarter. That\u2019s not enough to balance out the capex spending in raw arithmetic, but it shows that demand is growing alongside supply. Given the years-long time lag between breaking ground on a data center and selling its capacity, that\u2019s reassuring for investors.<\/p>\n
Critically, Amazon\u2019s AI play isn\u2019t limited to building large data centers. The company is also making serious long-term bets on chips like the Trainium TPU and the Arm-based Graviton processor. Those projects don\u2019t show up in capex numbers, but they can meaningfully improve margins for the company\u2019s cloud business.<\/p>\n
\u201cWe see the AI business following very much the same margin trajectory we saw in the core business before,\u201d Jassy said during the company\u2019s Q2 earnings call. \u201cAWS and Amazon Bedrock can have a wildly successful business without its own frontier model, and the reason is that there\u2019s not going to be a single model to rule them all.\u201d<\/p>\n
This dynamic isn\u2019t unique to Amazon. We saw similar patterns at Microsoft<\/a> and Google<\/a>, whose shares also popped after reporting strong cloud revenue. By the same token, companies like Meta<\/a> which have significant capex and no clear revenue source, are still experiencing intense skepticism from investors. Meta\u2019s stock fell 8% after reporting quarterly earnings this week, as investors focused on its cash flow crunch and continued spending.<\/p>\n Of course, investors like revenue and don\u2019t like expenses \u2014 that\u2019s how markets work. But it\u2019s important not to miss the broader lesson about the AI economy. Right now, investors are treating cloud hosts as the most reliable part of the AI stack, while remaining skeptical about the underlying economics for AI labs and AI startups.<\/p>\n But Amazon\u2019s hosting revenue is someone else\u2019s AI bill. In Anthropic\u2019s case, it\u2019s literally the same money<\/a>.<\/p>\n If that spending isn\u2019t sustainable for the big labs and their clients, the revenue won\u2019t be stable for Amazon and the other cloud hosts. There\u2019s real competition and differentiation at every level of the stack, but if demand for AI doesn\u2019t hold up, it\u2019s going to be a bad time for everyone.<\/p>\n In the end, it all comes back to David Cahn\u2019s $3 trillion question<\/a>. There\u2019s either enough demand to justify this buildout or there isn\u2019t. Cloud-hosting services like AWS may be a few steps removed from that demand problem, but that doesn\u2019t mean they\u2019re insulated from it.<\/p>\n<\/div>\n When you purchase through links in our articles, we may earn a small commission<\/a>. This doesn\u2019t affect our editorial independence.<\/em><\/p>\n