- Amazon shares fall 4% in pre-market trading after publishing Q4 results
- Weaker than expected cloud computing growth
- Q1 guidance below market expectations
- Amazon guides for $100 billion capex in 2025, mostly on AI
“Investor concerns about big spending on AI-related infrastructure have moved up a gear and Amazon is at the centre of the storm,” says Dan Coatsworth, investment analyst at AJ Bell.
“Last year we saw the first round of questions about how quickly companies would get a positive return on AI investments. Those concerns have now intensified as the big tech companies continue to throw billions of dollars on AI.
“Investors clearly want these companies to benefit from the AI revolution, but they want to be sure that the money is being well spent. The big worry is that they’re being too aggressive, particularly as cheaper ways of accessing AI are now emerging.
“Amazon has topped the pack with guidance for approximately $100 billion capex in 2025, the vast majority going on AI for its cloud division, AWS. It is splashing the cash on data centres, hardware, chips and networking gear to further lay the foundations to serve what it expects to be a gigantic wave of demand. That’s a huge outlay to stomach now and then a waiting game before it gets a positive financial return on the investment.
“Amazon insists it wouldn’t spend that money unless it was certain that customers will be knocking on its door. It predicts that virtually every application that exists today will be reinvented with AI at the heart.
“Investors have got the jitters about the gigantic spending for the jam tomorrow. It doesn’t help that the jam today is not as sweet as they’d like. AWS sales growth in the past quarter was a fraction below market expectations, extending a similar trend seen by Microsoft and Alphabet for cloud computing disappointment.
“Amazon has a good idea of what it will make in the current quarter and the $151 billion to $155.5 billion net sales guidance is less than the $158.5 billion forecast by the market.
“The Magnificent Seven – a group of tech firms that includes Amazon – earned the name by delivering exceptional growth. If growth rates are no longer ‘magnificent’, trouble is in store and hence the share price decline on Amazon’s results.
“Despite these negative factors, it’s important to recognise that Amazon continues to innovate and raise the bar. AI is being used to great effect to improve customers’ shopping experience and to achieve more cost savings in the business.
“Goods are being delivered faster than ever before and Amazon continues to be the first shop that comes to mind for millions of people when they want to buy a specific product.
“Fundamentally, Amazon remains in great shape. It has never been afraid to try new things – if they work, great; if they don’t, it moves on. Some experiments have been slightly off the mark, some were actual clangers, but it learns from each one. It can afford to take this approach because of the significant cash flow generated by the group. This strength should be recognised by investors, but it seems they’re fearing the worst over the very large bet on AI infrastructure.
“Will this be Amazon’s defining moment when it truly messes up? Time will tell, but given its experience and expertise in predicting trends, it’s hard to imagine that Amazon has gone down completely the wrong path.”
