This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Shares of Amazon (NASDAQ: AMZN) dropped 10.7% in February, according to data provided by S&P Global Market Intelligence. The company reported financial results for 2024 on Feb. 6 which handily beat expectations. But investors were concerned about a $100 billion expense coming in the near future.
For context, Amazon just capped off a historic year. The company's operating income came in at a record $68.6 billion, which was up 86% year over year and was almost as much as the previous three years combined. And the star of the show was the cloud-computing platform Amazon Web Services (AWS). AWS supplied more than half of the year's operating income with its net sales growing by 19% to over $100 billion.
Don't misunderstand: Amazon's AWS is one of the most important cloud-computing platforms, and its growth has been stellar for years. But more recently, growth in the industry is getting a boost from interest in artificial intelligence (AI). In short, enterprises are turning to AWS to experiment with and ultimately adopt AI applications.
To provide this service to customers, Amazon is having to spend aggressively to boost its computing power. For 2025, management anticipates spending $100 billion in capital expenditures (capex). And CEO Andy Jassy said, "The vast majority of that capex spend is on AI for AWS."
Amazon's AI expenses will modestly weigh on 2025 profits
I can never quite predict what investors will choose to focus on; I'm surprised that Amazon's capex guidance troubled anyone. That said, spending is up substantially. The company spent $48.1 billion and $77.7 billion on capex in 2023 and 2024, respectively. Spending $100 billion or more is a significant step up from there. There are cases of businesses spending so much on AI that it hurt profit margins, and perhaps that's what investors are worried about.
In fairness, there is some substance to investors' concerns here. Amazon's management expects its full-year 2025 operating income to drop by $700 million compared to 2024. And as the chart below shows, Amazon stock regularly drops when operating income drops.
It's a move that Amazon can afford to make
Investors need to take care to not lose perspective. Amazon's operating income is expected to pull back by 1% as it spends to grow its AI capabilities. That still puts 2025 on pace to be its second most profitable year ever.
Moreover, I don't really think that Amazon has much choice in the matter. The reality is that AWS is massive and growing. Cloud-computing customers want more AI functionality. If Amazon wants AWS to stay massive and growing, it needs to give customers what they want. Its capex spending is necessary from a competitive perspective.
Finally, if any company can afford it, it's Amazon. Consider that the company spent nearly $78 billion in capex in 2024 and still had free cash flow of $38 billion left over. Therefore, this is something Amazon can easily afford as it grows AWS.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
