We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
After delivering strong earnings but receiving mixed initial reactions, the hyperscalers are suddenly surging. Amazon ((AMZN - Free Report) ) and Microsoft ((MSFT - Free Report) ) have rallied roughly 20%–25% from their pre-earnings levels, while Alphabet ((GOOGL - Free Report) ) and Meta Platforms ((META - Free Report) ) have recovered sharply from their post-report lows. What began as another round of anxiety over runaway AI spending has quickly turned into renewed enthusiasm for the companies building the infrastructure behind the boom.
At the beginning of earnings season, however, investors were looking at these results through a very different lens.
Alphabet delivered what was, by almost any operating measure, an exceptional quarter. Revenue increased 24%, operating income climbed 30% and Google Cloud revenue surged 82%, with Cloud operating margins expanding to 35.6%. Yet investors focused overwhelmingly on the company’s $44.9 billion of quarterly capital expenditures and the resulting $5.9 billion free-cash-flow outflow.
Meta faced a similar reaction. Revenue increased 28% year over year, supported by a 14% increase in ad impressions and a 12% increase in average ad prices. But quarterly capital expenditures reached $31.1 billion, leaving the company with just $784 million of free cash flow, down from $8.5 billion a year earlier. Investors again treated the spending as the main story, overlooking the continued strength of the underlying business.
The central question hanging over the entire AI trade was straightforward: What kind of return can these companies ultimately earn on hundreds of billions of dollars of AI investment?
Until Amazon reported, the answer remained somewhat opaque. There were signs of accelerating demand across cloud, advertising and enterprise AI, but investors lacked a clear example connecting the enormous infrastructure buildout to both rapid revenue growth and expanding profits.
Amazon provided that example.
Second-quarter revenue increased 20% to $200.6 billion, while operating income surged 43% to $27.5 billion. More importantly, AWS revenue accelerated 37% to $42.2 billion, its fastest growth in 18 quarters, while AWS operating income jumped 64% to $16.6 billion. Despite the massive investment required to support that growth, the segment produced an operating margin of 39.4%.
The results underneath those headline numbers were even more revealing. Amazon disclosed that its AI business has surpassed a $25 billion annualized revenue run rate and continues to grow at a triple-digit percentage rate. Its custom-chip business, which includes Trainium and Graviton, has also exceeded a $25 billion run rate while growing at a triple-digit pace. AWS as a whole is now operating at a $169 billion annualized revenue rate.
That is what flipped the narrative.
Amazon is still spending aggressively, and its trailing-12-month free cash flow has fallen to a $7.6 billion outflow as infrastructure investment has surged. But the spending is no longer supported only by projections about future AI demand. It is already feeding businesses generating tens of billions of dollars in revenue, growing at exceptional rates and producing substantial operating profits.
Microsoft reinforced the same conclusion. Azure revenue increased 43% during the latest quarter, while annual Azure revenue surpassed $100 billion after growing 41% for the fiscal year. Microsoft Cloud generated $59.3 billion of quarterly revenue, up 27%, and Microsoft 365 Copilot surpassed 30 million paid seats, up from 20 million a year earlier.
We still do not have a complete answer to the AI ROI question. Amazon and Microsoft have demonstrated that the hyperscalers can monetize the infrastructure layer through cloud consumption, custom silicon, software subscriptions and enterprise services. The remaining uncertainty rests more heavily with the AI labs themselves, including OpenAI, Anthropic and their competitors where the ultimate margins, pricing power and economics of training and serving increasingly capable models remain less visible.
But the burden of proof has shifted. The hyperscalers are no longer merely promising that AI investment will eventually produce attractive returns. Amazon just gave investors their clearest evidence yet that those returns are already beginning to appear.
View the Zacks #1 Rank List
Image: Shutterstock
Amazon Just Flipped the AI Capex Narrative
After delivering strong earnings but receiving mixed initial reactions, the hyperscalers are suddenly surging. Amazon ((AMZN - Free Report) ) and Microsoft ((MSFT - Free Report) ) have rallied roughly 20%–25% from their pre-earnings levels, while Alphabet ((GOOGL - Free Report) ) and Meta Platforms ((META - Free Report) ) have recovered sharply from their post-report lows. What began as another round of anxiety over runaway AI spending has quickly turned into renewed enthusiasm for the companies building the infrastructure behind the boom.
At the beginning of earnings season, however, investors were looking at these results through a very different lens.
Alphabet delivered what was, by almost any operating measure, an exceptional quarter. Revenue increased 24%, operating income climbed 30% and Google Cloud revenue surged 82%, with Cloud operating margins expanding to 35.6%. Yet investors focused overwhelmingly on the company’s $44.9 billion of quarterly capital expenditures and the resulting $5.9 billion free-cash-flow outflow.
Meta faced a similar reaction. Revenue increased 28% year over year, supported by a 14% increase in ad impressions and a 12% increase in average ad prices. But quarterly capital expenditures reached $31.1 billion, leaving the company with just $784 million of free cash flow, down from $8.5 billion a year earlier. Investors again treated the spending as the main story, overlooking the continued strength of the underlying business.
The central question hanging over the entire AI trade was straightforward: What kind of return can these companies ultimately earn on hundreds of billions of dollars of AI investment?
Until Amazon reported, the answer remained somewhat opaque. There were signs of accelerating demand across cloud, advertising and enterprise AI, but investors lacked a clear example connecting the enormous infrastructure buildout to both rapid revenue growth and expanding profits.
Amazon provided that example.
Second-quarter revenue increased 20% to $200.6 billion, while operating income surged 43% to $27.5 billion. More importantly, AWS revenue accelerated 37% to $42.2 billion, its fastest growth in 18 quarters, while AWS operating income jumped 64% to $16.6 billion. Despite the massive investment required to support that growth, the segment produced an operating margin of 39.4%.
The results underneath those headline numbers were even more revealing. Amazon disclosed that its AI business has surpassed a $25 billion annualized revenue run rate and continues to grow at a triple-digit percentage rate. Its custom-chip business, which includes Trainium and Graviton, has also exceeded a $25 billion run rate while growing at a triple-digit pace. AWS as a whole is now operating at a $169 billion annualized revenue rate.
That is what flipped the narrative.
Amazon is still spending aggressively, and its trailing-12-month free cash flow has fallen to a $7.6 billion outflow as infrastructure investment has surged. But the spending is no longer supported only by projections about future AI demand. It is already feeding businesses generating tens of billions of dollars in revenue, growing at exceptional rates and producing substantial operating profits.
Microsoft reinforced the same conclusion. Azure revenue increased 43% during the latest quarter, while annual Azure revenue surpassed $100 billion after growing 41% for the fiscal year. Microsoft Cloud generated $59.3 billion of quarterly revenue, up 27%, and Microsoft 365 Copilot surpassed 30 million paid seats, up from 20 million a year earlier.
We still do not have a complete answer to the AI ROI question. Amazon and Microsoft have demonstrated that the hyperscalers can monetize the infrastructure layer through cloud consumption, custom silicon, software subscriptions and enterprise services. The remaining uncertainty rests more heavily with the AI labs themselves, including OpenAI, Anthropic and their competitors where the ultimate margins, pricing power and economics of training and serving increasingly capable models remain less visible.
But the burden of proof has shifted. The hyperscalers are no longer merely promising that AI investment will eventually produce attractive returns. Amazon just gave investors their clearest evidence yet that those returns are already beginning to appear.