Behind Amazon's (AMZN.US) two-day jump of 20%: AWS accelerates growth validating AI demand, concerns arise over capital expenditures and depreciation pressure

According to Zhitong Finance APP, Amazon (AMZN.US) stock price has risen for two consecutive trading days after announcing better-than-expected second-quarter results, with a cumulative increase of about 20%. From the perspective of bulls, despite the upward revision of capital expenditure expectations for 2026 and negative free cash flow, the accelerated growth of Amazon's cloud computing business revenue for the fifth consecutive quarter alleviates concerns about its massive artificial intelligence (AI) capital investments not generating returns. However, some cautious market participants believe that what needs to be truly validated for Amazon is the demand for artificial intelligence (AI), rather than the relationship between construction costs and actual economic returns, which means that Amazon's stock price may come under pressure again due to capital expenditures in the future.

Amazon Q2 Results Exceed Expectations, Cloud Business Accelerates Growth Validating AI Demand

The financial report shows that Amazon's total revenue in the second quarter increased by 20% year-on-year to $200.6 billion, better than the average analyst expectation of $197 billion; operating profit was $27.5 billion, a year-on-year increase of 43%; net profit was $62.6 billion, a year-on-year increase of 245%, which includes $53.4 billion in pre-tax non-operating other income, mainly from its investment in Anthropic; diluted earnings per share were $5.75, far exceeding the average analyst expectation of $1.82.

The core Amazon Web Services (AWS) revenue increased by 37% year-on-year to $42.2 billion, better than the average analyst expectation of $40.6 billion, marking the fastest growth rate since the fourth quarter of 2021. Before the financial report was released, investors were highly focused on AWS's growth. Amazon CEO Andy Jassy stated that AWS is "thriving" and pointed out that the growth momentum of its AI and self-developed chip business units is strong, with both achieving an annualized revenue of over $25 billion and a year-on-year growth rate in the triple digits.

Like other large tech companies, Amazon is making large-scale investments in data centers and chips to seize the opportunities brought by the rapid growth of AI and cloud computing service demand. Amazon's capital expenditure in the second quarter reached $54.2 billion, up from $32.1 billion in the same period last year. Its significant investment in AI products and infrastructure has led to negative free cash flow—by the end of the second quarter, the company had a net outflow of $7.6 billion in free cash flow over the past 12 months, compared to a net inflow of $18.2 billion a year ago.

Amazon has also raised its capital expenditure expectations for 2026 from the previously estimated $200 billion to $220 billion. Jassy stated that most of this expenditure will be used in the AI field. He noted that the rise in memory prices has pushed up expectations for its capital expenditures. He added that Amazon's spending spree is unlikely to slow down in the short term, "Even if we reach this level, we will still not have enough capacity to meet all demand by 2026, and I believe this trend will continue in 2027. In fact, we believe that the demand for 2028 is already very significant."

Jassy also stated, "We are in a very favorable position in this wave of AI transformation." He emphasized that Amazon's AI infrastructure investments are crucial to meet the growing demand for its cloud services. He mentioned that AWS's backlog (i.e., contracts not yet launched) has reached $496 billion this quarter

The Market Welcomes the Validation of AI Demand but Overlooks Concerns About Capital Expenditure and Depreciation

Amazon's second-quarter earnings report further enhanced the validation of AI demand—this validation was already reflected in Amazon's first-quarter earnings report—and provided a stronger confirmation of related trends. This is also a significant reason for the surge in Amazon's stock price following the earnings report.

However, at the same time, the rise in Amazon's stock price seems to selectively ignore the fact that the company has raised its full-year capital expenditure expectations. If we refer to Amazon's own historical development, capital expenditure pressure typically does not favor the company's stock price performance, and the current round of capital investment cycles differs greatly from the past. This round of capital expenditure is on a larger scale, and as the company continues to announce new capital investment plans, the stage for realizing investment returns is constantly being delayed. Meanwhile, the gap between the growth rate of capital expenditure and the growth rate of revenue remains very evident.

In its second-quarter earnings report, Amazon raised its capital expenditure plan from approximately $200 billion to about $220 billion. The expected time from investment to the first billing revenue is estimated to be 6 to 24 months, with some assets having a lifespan of up to 30 years. This means that investment returns will gradually materialize over several years (rather than several quarters), and as demand stabilizes, different assets will generate returns at different paces under varying economic conditions. Additionally, when Amazon's capital expenditure cycle started in 2021 to 2022, the company had a stronger free cash flow foundation, which is completely different from the current situation.

This is why some market participants believe that after the initial market excitement from the second-quarter earnings report fades, Amazon's stock price will fall back again. In the eyes of some investors, the strong AI demand demonstrated by Amazon's AWS business does not address the economic return issues of capital expenditure.

Some analysts point out that the strong performance of the AWS business does not prove that Amazon's current capital investments are justified. AWS is merely one link in the AI investment chain—it indicates that companies are migrating their systems to the cloud, and nothing more. It is actually on the weaker end of AI investment impact.

The truly important capital expenditure issues lie in AI training businesses and custom chips (Trainium), and the demand and economic models in these two areas are still in the early stages. Although the currently published data for AI training and chip businesses perform well, demand is highly concentrated in a few AI laboratories. More importantly, the profitability models for these businesses have yet to be validated. The market still does not know what profit margins these businesses can achieve under stable operating conditions. What is the capital return rate under continuous depreciation pressure? What is the actual lifespan of the related assets?

Some signs are even more concerning. In addition to free cash flow turning negative, depreciation expenses are also rising continuously. In the second quarter, Amazon's overall depreciation and amortization expenses (D&A) increased year-on-year from approximately $15.2 billion to about $20 billion. Among them, AWS-related depreciation expenses rose from about $4.8 billion to approximately $8.1 billion. More importantly, the growth rate of depreciation is outpacing the growth rate of revenue—AWS's second-quarter depreciation and amortization expenses grew by about 67%, while revenue grew by only about 37% This indicates that Amazon is in a highly aggressive phase of building AI-based assets. The costs that inevitably arise during these construction processes will negatively impact the company's cash flow and reported profits (and the stock price should reflect this), although these factors do not necessarily indicate that the company has significant problems.

In addition, the approximately $90 billion in new assets added in the first half of the year has just begun to be depreciated, so the profit margins in the subsequent quarters will face a greater depreciation burden. The company also faces a contradiction between the five-year lifespan assumption for servers and the rapid obsolescence risk of AI devices.

Overall, the increase in Amazon's stock price following the second-quarter earnings report may have already exceeded the valuation uplift that should come from validated AI demand, while negative factors such as increased capital expenditures and depreciation pressure seem not to have been fully priced in by the market. The market is overlooking the pressures and uncertainties present in the capital investment phase that Amazon is in. Investors may continue to wait and see until the AI demand indicated by Amazon's capital expenditures and its economic viability are proven, and until the gap between AWS revenue growth and depreciation expense growth begins to narrow, before reassessing buying opportunities