There is currently a costly paradox in the world of Big Tech. Although artificial intelligence is supposed to be the engine of the next generation of growth, for now it is mainly generating gigantic cash outflows. Friday’s 8% drop in Amazon’s shares is a clear signal that the market is no longer feeding on promises alone and is starting to meticulously count margins.
A scale of concern
Amazon’s planned capital expenditure, expected to reach an astronomical $200 billion in 2026, puts the company at the centre of the AI viability debate. Industry estimates suggest that technology leaders will spend a total of more than $600 billion on infrastructure this year. Investors, accustomed to the high capital efficiency of traditional software, fear that the generative AI arms race will permanently reduce the sector’s profitability.
There is a real risk that new, rapidly evolving AI tools will start to cannibalise demand for standard cloud services and software, while increasing the operational costs of maintaining GPUs and data centres.
Andy Jassy’s defensive strategy
While Alphabet presents its spending with great confidence, Amazon’s CEO Andy Jassy has adopted a more conservative tone. His narrative is based on scale: AWS generated $35.6 billion in revenue in the last quarter with 24 per cent growth. Jassy rightly points out that sustaining such momentum with an annual run rate of $142 billion is a much more difficult feat than the high percentage increases recorded by smaller competitors such as Google Cloud and Microsoft Azure.
However, this reasoning was not enough to reassure analysts. While brokerages such as MoffettNathanson believe Amazon sees real demand to justify this expenditure, they simultaneously warn that the margin for error is shrinking dramatically. With a current price-to-earnings ratio of 27.01, Amazon is valued higher than Microsoft, putting enormous pressure on the company to prove results.
There is a clear lesson for business decision-makers: the era of ‘AI at all costs’ is coming to an end. What matters now is not just having the best models, but above all demonstrating that massive investments in infrastructure will translate into real free cash flow growth, not just more server room upgrade cycles.
