Investors Love Cloud Hosts, Not AI Labs
Amazon's strong quarterly earnings, fueled by cloud revenue, lifted its stock nearly 10%, but the sustainability of AI-driven spending remains uncertain if demand falters.
Amazon reported better-than-expected second-quarter earnings on Thursday, with net sales rising 20% year-over-year. Cloud revenue was a standout, as AWS revenue grew 37% to $42 billion for the quarter. The positive results sent Amazon's stock up nearly 10% in after-hours trading.
Despite concerns about excessive spending, Amazon continues to invest heavily in infrastructure. Capital expenditures on property and equipment — including GPUs, natural gas turbines, and land — reached $173 billion for the fiscal year ended June 30, up from $107.65 billion the previous year. The company also raised its 2026 capex forecast from $200 billion to $220 billion, drawing down its cash reserves by $7.6 billion over the past 12 months, marking its first quarter of negative free cash flow this year.
Investors are reassured by the growing demand for AWS, which helps justify the spending. Amazon is also making long-term bets on custom chips like Trainium and Graviton, which can improve margins in its cloud business. CEO Andy Jassy noted that the AI business is following a similar margin trajectory as Amazon's core business.
Similar patterns emerged at Microsoft and Google, whose shares rose after strong cloud earnings. In contrast, Meta's stock fell 8% after its earnings report, as investors focused on high spending without a clear revenue source.
However, the cloud hosts' success is not insulated from the broader AI economy. AWS revenue is essentially someone else's AI bill — in Anthropic's case, it's the same money. If AI labs and their clients cannot sustain spending, cloud revenue could become volatile. The key question remains whether there is enough demand to justify the massive buildout.
