Investors Back Cloud Giants but Skeptical of AI Lab Spending
Amazon's Q2 earnings beat estimates on 37% AWS revenue growth, but investors are watching the massive data center capex, while cloud hosts remain favored over AI labs.
Amazon reported better-than-expected second-quarter earnings on Thursday, with net sales up 20%. Cloud revenue was the standout, driving the stock nearly 10% higher in after-hours trading.
Despite ballooning expenses, Amazon is not pulling back on data center investments. In the fiscal year ended June 30, the company spent $173 billion on property and equipment—including GPUs, natural gas turbines, and land—up from $107.65 billion the year prior. Amazon also raised its 2026 capex forecast from $200 billion to $220 billion, even as it dipped into cash reserves. The company ended the quarter with $7.6 billion less cash than a year ago, marking its first negative free cash flow period this year.
What justifies this spending is AWS revenue, which rose 37% year over year to $42 billion for the quarter. While not fully offsetting capex, it signals growing demand alongside supply. CEO Andy Jassy noted that the AI business is following a similar margin trajectory to the core business, and that AWS can succeed without its own frontier model.
This pattern echoes Microsoft and Google, whose shares also popped after strong cloud earnings. In contrast, Meta—which has high capex but no clear AI revenue source—saw its stock fall 8% this week.
However, analysts caution that cloud hosting revenue depends on AI labs' ability to pay. If AI demand fades, it will hit cloud providers too. This is David Cahn's $3 trillion question: whether enough demand justifies the massive infrastructure buildout.
