Amazon is set to increase its capital expenditure to approximately $200 billion in 2026, with the majority of this investment earmarked for artificial intelligence and data center infrastructure. This substantial spending is particularly focused on bolstering its Amazon Web Services (AWS) cloud business, which is a key driver of the company's overall operating profit. This increased investment comes as Amazon aims to meet the escalating demand for AI-related services.
This aggressive spending strategy has raised concerns about Amazon's cash flow, as evidenced by a sharp decline in free cash flow from $25.9 billion to $1.2 billion, primarily attributed to a $59.3 billion surge in equipment spending for AI. Despite this, Amazon anticipates that much of the new capacity will begin generating revenue through 2027 and 2028. Analysts like Dan Romanoff of Morningstar emphasize that AWS and AI are central to Amazon's future, though higher depreciation associated with these investments could impact cloud margins.
AWS revenue saw a 28% expansion in the first quarter, following 17% growth in the same period last year, with early Q2 forecasts suggesting growth exceeding 30%. While AWS is projected to account for about 21% of anticipated revenue, it is expected to generate approximately 60% of Amazon's overall operating profit. This highlights the critical importance of maintaining margin discipline within AWS. For the second quarter, AWS revenue is forecast to reach $40.49 billion, with an operating margin of 33.8%, down from 37.7% in Q1.
The market's response has seen Amazon shares sink by 7.4% ahead of its Q2 results, with investor concerns centering on the heavy spending and its effect on cash flow. Credit investors have also shown reduced appetite for Amazon's bond issues, making it more expensive to fund infrastructure growth. However, a strong performance by AWS, sustained profit margins, or improved cloud growth could lead to a rebound in share prices.
