Amazon's stock drops as investors question whether $200 billion can buy an AI edge

By Christine Ji and Emily Bary

It's not just that Amazon is pouring tons of money into capital expenditures, notes an analyst. It's that the company seems to be playing defense.

Amazon just grew AWS revenue at the fastest clip in 13 quarters, but some on Wall Street are worried about the cloud unit's competitive positioning.

Amazon.com may risk losing its edge, some analysts say, and now the company is spending heavily to try to maintain it.

The most eye-popping figure from Amazon's (AMZN) earnings report was the company's projection that it could dole out $200 billion in capital spending this year. While the company wouldn't actually be increasing its capital expenditures by as much as Alphabet, it would be spending more in aggregate.

Don't miss: Amazon's stock sinks due to massive spending plans. What Wall Street has to say.

Shares of Amazon are down 7% in premarket action Friday, with the company deemed to be in show-me mode around whether those investments can deliver appropriate returns. The stock has been a significant tech-sector laggard over the past year and now is on track to further its underperformance.

Despite Amazon's best cloud-revenue growth in 13 quarters, at 24%, D.A. Davidson analyst Gil Luria isn't sold on the idea that Amazon's spending is paying off.

In fact, he's now worries the company risks surrendering its lead on a few fronts.

"With the context of results from Microsoft and Google, we see AWS continuing to lose its lead and now scrambling to catch up through escalating investment," he wrote of the Amazon Web Services operation. "We are also increasingly concerned about Amazon Retail's transition to a new chat-driven Internet dominated by Gemini and ChatGPT."

Luria downgraded Amazon's stock to neutral from buy. He noted that, while Amazon had the lowest rate of cloud growth among the three major players, that's not just because the company has the biggest cloud business and thus is growing from a larger base. He thinks Google's in-house frontier AI labs gives the company an advantage over Amazon, while Microsoft gets to benefit from its tight OpenAI relationship. Even though Amazon shared that its Trainium custom-chip business had achieved $10 billion run-rate revenue in the fourth quarter, Luria believes that customers still prefer Google's chips over Amazon's, he said.

Competition among cloud providers may force Amazon's hand in investing in OpenAI to remain relevant in the AI race, Luria added. While Amazon is the primary cloud partner to Anthropic, he notes that Google and Microsoft (MSFT) have also invested in Anthropic, reducing the competitive advantage.

On the retail side of the business, Luria worries, he said, that the future of shopping may be more linked to chatbots, putting Amazon at a "structural disadvantage" if it doesn't strike the right relationships.

"We believe the Internet is changing very fast and merchants that are integrated into ChatGPT and Gemini (e.g. Shopify merchants) will have a significant advantage," he wrote.

Evercore ISI's Mark Mahaney was more bullish on Amazon's prospects but noted that investors seem worried about the financial implications of the required investment, as enormous amounts of capex will turn into depreciation expenses in the coming years.

Amazon's free cash flow could turn negative this year, he wrote, and the stock is "likely range-bound" until investors feel more confident that the company can get on a better free-cash-flow path for 2027, or that revenue trends will improve enough this year to justify the massive capital expenditures.

Bernstein's Mark Shmulik wrote that Amazon borrowed from "the playbook that hasn't yielded positive stock performance elsewhere," as it beat on some core metrics while forecasting a huge boost in spending.

See also: Why Alphabet's stock is falling despite booming cloud growth

"Management highlighted the company's strong track record in investment cycles - true - and a line of sight into [return on invested capital] tied to AWS commits and selling out capacity as it comes online," he wrote. "But with the dependency on AI, software, and enterprise companies to keep spending, FCF likely going negative this year, and the mega caps on a collision course to extract returns, investors needed more than promises to underwrite this story."

-Christine Ji -Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

02-06-26 0910ET