Investors love AI — if you're the cloud host

Amazon reported better-than-expected second-quarter earnings on Thursday, with net sales rising 20% and cloud revenue standing out as a particular bright spot. The results sent Amazon’s stock up nearly 10% in after-hours trading.

Crucially, Amazon isn’t slowing down on data center spending, despite the conventional wisdom that investors want companies to rein it in. The company spent $173 billion for the fiscal year ended June 30 on property and equipment — a category covering GPUs, natural gas turbines, and land — up from $107.65 billion the year before. It also raised its 2026 capex forecast from $200 billion to $220 billion, even as it dips into cash reserves to help cover the cost: Amazon ended the quarter with $7.6 billion less cash than it had 12 months earlier, marking its first period of negative free cash flow this year.

Under normal circumstances, ballooning expenses would be a tough sell to investors. But Amazon has a revenue engine that helps justify the spending: AWS revenue rose 37% year over year to $42 billion for the quarter. That’s not enough to offset the capex spending in raw arithmetic, but it shows demand growing alongside supply — reassuring for investors given the years-long lag between breaking ground on a data center and selling its capacity.

Amazon’s AI play isn’t limited to building large data centers. The company is also making long-term bets on chips like the Trainium TPU and the Arm-based Graviton processor — projects that don’t show up in capex numbers but can meaningfully improve margins. “We see the AI business following very much the same margin trajectory we saw in the core business before,” Jassy said on the company’s Q2 earnings call, adding that AWS and Amazon Bedrock can succeed without their own frontier model because no single model will dominate the market.

The pattern isn’t unique to Amazon: Microsoft and Google shares also popped after reporting strong cloud revenue. By contrast, Meta — which has significant capex and no comparably clear AI revenue source — saw its stock fall 8% after reporting quarterly earnings this week, as investors focused on its cash flow crunch and continued spending. Right now, investors are treating cloud hosts as the most reliable part of the AI stack, while staying skeptical about the underlying economics for AI labs and AI startups. But Amazon’s hosting revenue is someone else’s AI bill, and if that spending isn’t sustainable for the big labs and their clients, the revenue won’t stay stable for Amazon and other cloud hosts either.

Why it matters

The gap between how investors treat cloud infrastructure providers and how they treat AI labs suggests markets still see unresolved risk in whether AI demand can justify the buildout — a question that eventually reaches even the “insulated” cloud hosts if it goes unanswered.