Facade with sign and logo at the Moffett Place office Amazon in the Silicon Valley, Mountain View, … [+]
Updated February 8, 2024: This post has been updated to include a comment from an Amazon spokesperson.
The business of generative AI teeters on an upside-down pyramid. With the exception of Nvidia, which has benefited tremendously from the $1 trillion in capital spending by cloud services providers, those using AI chatbots are still searching for a killer app, noted my book, “Brain Rush.”
Will capital spending keep rising as investors lose patience with the delayed payoff from AI chatbots?
This question comes to mind in considering the stock market’s reaction to the latest earnings reports from tech giants Amazon, Google, Meta, and Microsoft. These four companies announced $320 billion in capital spending plans for 2025, according to the Wall Street Journal.
Yet investors had mostly negative reactions during their earnings reports for the December 2024-ending quarter. While shares of Meta gained 7% following the company’s earnings report, the value of stock in Amazon, Alphabet, and Microsoft fell 4%, 7%, and 6%, respectively following the release of their latest results, noted the Journal.
In my view, investors are punishing shares of companies whose financial reports did not beat-and-raise. As I wrote in a February 5 column on Forbes about Alphabet, investors focused their disappointment on slower-than-expected growth and higher-than-expected capital spending for Google Cloud.
Following Amazon’s mixed results, is the drop in the company’s stock price a buying opportunity?
The answer depends on whether Amazon can get a payoff from the enormous bet it is making on AI — in the form of sustainable, expectations-beating growth. Analysts meanwhile see the company’s stock as about 10% undervalued, according to TipRanks.
Amazon attributed its lower growth guidance to the strong dollar and 2024’s leap year. “This guidance anticipates an unusually large, unfavorable impact of approximately $2.1 billion, or 150 basis points, from foreign exchange rates. Also, as a reminder, in first quarter 2024 the impact from Leap Year added approximately $1.5 billion in net sales,” according to a February 7 email from a spokesperson excerpting Amazon’s earnings release.
Amazon declined to answer questions regarding the revenue increase and financial return on the company’s AI expenditures. “We have not provided details on your other questions,” added the email.
Amazon’s Mixed Financial Performance And Prospects
Amazon stock fell about 4% on February 7 following a mixed earnings report.
The company delivered a generally strong fourth quarter according to analysts yet “projected lower-than-expected sales and operating income,” reported the Journal, as investors are “starting to question” the prudence of the AI “spending spree” — including Amazon’s 21% increase in 2025 capital expenditures, according to CNBC.
“Virtually every application that we know of today is going to be reinvented with AI inside of it,” Amazon CEO Andy Jassy said on a Thursday analyst call.
Here are the key numbers:
- Q4 2024 revenue: $187.8 billion — up 10% — in-line with expectations, the Journal reported.
- Q4 2024 AWS revenue: $28.8 billion — up 19% and slightly lower than expected, noted the Journal.
- Q4 2024 AWS operating income: $10.63 billion — up 48% and $180 million above the StreetAccount consensus, reported CNBC. AWS accounted for 15% of Amazon’s revenue and just over half of the company’s operating income in Q4, noted CNBC.
- Q1 2025 revenue guidance: A range between $151 billion and $155.5 billion — growth in a range between 5% and 9%, noted the New York Times – the high end of which was below Wall Street expectations, wrote the Journal.
- Q1 2025 operating income guidance: A range between $14 billion and $18 billion — the high end of which was below Wall Street expectations, noted the Journal.
A key financial challenge Amazon faces is the effect of the stronger dollar. Amazon’s first quarter guidance assumes “a $2.1 billion headwind from foreign exchange rates,” according to CNBC.
Amazon was surprised by the dollar’s strength in the fourth quarter. In Q4, Amazon said it saw $700 million “more of foreign exchange headwind than we anticipated,” according to the investor conference call. The e-commerce giant expects those headwinds to persist into the first quarter of 2025.
Will Amazon’s $100 Billion Bet On AI Pay Off?
Jassy is betting heavily on making Amazon an AI leader — but the payoff in terms of faster growth has been elusive. In addition to capital expenditures, Amazon has formed special teams to “drive generative AI innovation,” according to the Journal, and has released new services including an AI shopping assistant.
Amazon’s AI products include “its own set of Nova models, Trainium chips, a shopping chatbot, and a marketplace for third-party models called Bedrock,” noted Bloomberg.
Amazon sees great potential in AI — which represents “probably the biggest technology shift and opportunity in business since the internet,” Jassy told investors on the conference call.
Nevertheless, he warned of “lumpy” growth possibly flowing from capacity issues — such as delays in receiving hardware chips – both from outside suppliers and Amazon’s own chip design unit – and insufficient electricity, according to Bloomberg.
Where Will Amazon’s Stock Go Next?
Wall Street sees some upside to Amazon stock. Based on 40 analysts offering 12-month price targets, Amazon’s stock price is roughly 9.5% below the average target of $261.42, noted TipRanks.
Yet analysts homed in disappointing guidance. “AWS growth did not accelerate as anticipated and instead matched Q3 levels, indicating that the company is challenged by the same types of capacity constraints facing rivals Google and Microsoft,” Emarketer analyst Sky Canaves told Bloomberg.
Another analyst seemed to attribute the disappointment about guidance to currency exchange. Amazon’s below expectations guidance was mostly attributable to “the impact of a big currency drag and the impact of lapping a leap year,” DA Davidson analyst Gil Luria said, according to Bloomberg.
Investors are running out of patience with companies spending what they see as too much money for too little expectations-beating growth. Amazon bulls could pay the price unless AI generates more revenue for the company.
