Amazon.com Inc. shares have largely climbed on the back of two trends: strength in its cloud business and a focus on costs. Now both could be in question.
Disappointing results from major cloud-computing companies Alphabet Inc. and Microsoft Corp. suggest reasons to be cautious about Amazon Web Services, the biggest player in the space — and a central plank in Wall Street’s nearly unanimously positive view on the stock. At the same time, a trend of growing capital expenditures as firms invest heavily in artificial intelligence could, if Amazon follows suit, force a recalibration of how profitable it can be this year.
The performance of AWS and the company’s spending plans will likely be a main focus of Amazon’s results, due after the market close. Shares hit a record earlier this week, and have risen nearly 50% off an August low. The stock gained 0.7% on Thursday.
“If the trend of relative cloud weakness is real, as it appears to be, we could see shares move lower if AWS disappoints,” said Dan Genter, who oversees about $8 billion as chief executive officer of Genter Capital Management. “We want to see margin improvement, and if we don’t see continued revenue growth, we will be entirely dependent on cost cutting for that at a time when companies are spending a lot more.”
Cloud computing is seen as a part of software where AI will emerge early as a tailwind to growth, but the latest reads have undercut the timing of when that might occur. Results from Alphabet featured weaker-than-expected cloud revenue, following in the footsteps of Microsoft, which last week gave a similarly mixed read on its own cloud business, although that in part reflected supply constraints amid high demand.
The lack of pronounced growth inflections has investors growing impatient about when the billions of dollars invested in AI infrastructure will pay off. While there remains a lot of long-term optimism that it will over the long term, some have balked at the heavy spending.
“Capex is starting to feel like the 800-pound gorilla in the room, and there’s some fatigue at all this spending,” said Jake Behan, head of capital markets at Direxion. “Right now its almost less about when the AI spending will be monetized, and more about whether it can be legitimized.”
Alphabet expects to invest about $75 billion in capex this year as it continues to build out its AI infrastructure. That target was far higher than the consensus, and came in the wake of Meta Platforms Inc.’s plans to invest as much as $65 billion, also significantly more than had been expected. In addition, Microsoft is looking to spend $80 billion building out data centers this fiscal year, while Oracle Corp. — a small but growing player in cloud computing — is part of a huge joint venture to fund AI infrastructure.
Wall Street expects Amazon to have spent about $76 billion on capex in 2024, up from $53 billion the prior year. That’s seen swelling to $86 billion in fiscal 2025. The issue isn’t having the cash; Bloomberg Intelligence writes that Amazon “has the financial firepower to fund tens of billions of dollars in share repurchases, or pay a large inaugural dividend,” if investments in AI weren’t priorities.
While Amazon Web Services accounted for nearly 16% of Amazon’s 2023 revenue — the last full year for which data is available — it is a major contributor to the company’s operating income. On a constant currency basis, analysts expect AWS sales growth of 19% this quarter, according to Bloomberg Consensus estimates.
Wall Street expects revenue growth of about 11% in each of the next two fiscal years, along with net earnings growth of 22% in both years, according to data compiled by Bloomberg. Such trends are why the company is so well liked; 94% of the analysts tracked by Bloomberg recommend buying the stock, and Amazon is the largest overweight among hedge funds, according to Jefferies.
Amazon has been focused on tightening its belt, a factor that, along with durable revenue growth, has compressed its multiple. Shares trade around 32 times estimated earnings, well below its 10-year average, which is above 50. While the multiple has trended up since a low hit in mid-2024, Amazon is cheaper than retail giant Walmart Inc., and not much above Apple Inc. and Microsoft.
Sarah Henry, portfolio manager Logan Capital Management, is among those who find it attractive, and who has faith in the AI strategy.
“After this spending rolls off, a more normalized and higher level of profitability will emerge, which will further compress the valuation and make the stock look even more attractive,” she said. “At the same time, if it can show that spending on these magic computers can generate real returns, further entrenching its market position, that will also lead to a higher stock price over time.”
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