Amazon learns a tough lesson in a market bailing on tech. Why we must be patient
C
CNBC Finance
7 min read
Amazon shares plummeted Thursday evening after the tech giant revealed a $200 billion capital expenditures plan for this year. Additionally, management's current quarter profit forecast miss overshadowed what was otherwise a generally good final quarter of 2025. Revenue increased 14% year over year to $213.39 billion, beating expectations for $211.33 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased 5% to $1.95, missing the $1.97 estimate, per LSEG. Operating income increased 18% year over year to $24.97 billion, beating the $24.77 billion consensus forecast. Amazon's operating income included three special charges that negatively impacted operating income by about $2.4 billion. Why we own it Amazon may be widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing business with high margins. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be. Prime leverages free shipping and video streaming with tons of other perks to keep users paying every month. Competitors : Walmart , Target , Microsoft , and Alphabet Most recent buy : April 15, 2025 Initiated : February 2018 Bottom line Let's break down why Amazon shares were falling nearly 11% in after-hours trading, extending a slump that has been market-wide with the Magnificent Seven and other tech stocks selling off this week. Here's the thing: the reported fourth quarter of 2025 was actually solid. The bulls wanted to see Amazon Web Services revenue growth accelerate, and the company delivered. The segment reported revenue growth of roughly 24% and added about $7 billion in revenue year over year. The cloud segment also delivered better-than-expected margins, a great achievement because management has to balance profitability with investments. It's a sign of virtually no wasted capacity. Whatever is added is being used. The company's North America and International units also posted year-over-year margin expansion when excluding certain charges in the quarter. So, why is the market rebelling against Amazon? With management aiming for $200 billion capex spend this year â about $50 billion more than analysts had forecasted â Wall Street is concerned that those investments won't be monetized and flow into profit quickly enough. AMZN 5Y mountain Amazon 5 years We've seen other Mag 7 companies talk about ramping up investments this earnings season â including fellow portfolio names Meta Platforms and Alphabet , which both got passes. Why isn't Amazon? The market took issue with the higher costs that were not accompanied by more upside in the 2026 first-quarter revenue and profit guidance. If you're going to spend more than anyone was anticipating, it's got to be backed by higher returns. Still, Amazon isn't wasting this capital, investing in the future and wouldn't be spending this money if the demand signals weren't there. Otherwise, it would be reckless. CEO Andy Jassy addressed this on the earnings call, saying, "We have deep experience understanding demand signals in the AWS business and then turning that capacity into strong return on invested capital. We're confident this will be the case here as well." This demand was backed by the numbers. AWS finished the quarter with a backlog of $244 billion. That was up 40% year over year and 22% quarter over quarter, and a few billion dollars more than the cloud backlog of $240 billion that Alphabet reported in its quarterly results Wednesday evening. Amazon believes its aggressive spending will generate a strong long-term return on its invested capital, and we have little doubt about its judgment. Jassy said that "customers really want AWS for core and AI workloads," and the business is "monetizing capacity as fast as we can install it." Assurances aside, the market doesn't have patience right now, and won't to take the leap of faith. But we are â willing to wait it out as investors who believe in Amazon for the long haul. Is the big post-earnings stock drop disappointing? Of course, it is. Shares traded back at its levels from May 2025. While reiterating our buy-equivalent 1 rating, we have no choice but to lower our price target to $250 per share from $275 to account for the ramping investments and tech selloff. Commentary Revenue at cloud unit Amazon Web Services (AWS) increased 23.6% year over year to $35.58 billion, beating estimates by about $514 million. The consensus growth forecast was about 21.8%. The quarter marked an important growth acceleration from 20.2% in the prior quarter. It was also the fastest growth rate in 13 quarters. Operating income and margin were also positive surprises. While heavy investments caused margins to decline 190 basis points year over year to 35.03%, that was still better than the consensus estimate of 33.98%. On the call, Jassy said, "AWS is now a $142 billion annualized run rate business, and our chips business, inclusive of Graviton and Trainium, is now over $10 billion in annual revenue run rate growing triple-digit percentages year-over-year." Custom chips have been a major focus for hyperscalers, including Alphabet, that want to reduce reliance on Nvidia . While Nvidia's all-purpose chips have been the gold standard for running and training AI, they are expensive and hard to get. Amazon and others have been investing in their own silicon, incurring upfront costs but aiming to deliver cheaper compute. As for the rest of the company's business segments, there were solid revenue beats in Online Stores , Subscription Services , Advertising Services , and the Other category, which includes businesses not accounted for in the other segments such as health care, licensing and co-branded credit cards. Only Physical Stores and Third Party Seller Services missed the consensus forecast. By geography, North America sales increased 10% to $127.08 billion but missed the consensus estimate by $149 million. The reported operating margin was 9.03%, expanding 102 basis points year over year and beating estimates of 8.51%. In the International segment, revenue increased 17% year over year and beat the consensus estimate. Reported operating margins contracted 98 basis to 2.05% and missed expectations of about 3.96%. However, the segment was negatively impacted by $1.1 billion special charges mentioned earlier. Without this impact, operating margins would have expanded year over year. On the Capital Expenditures side, Amazon invested approximately $39.5 billion in the fourth quarter, exceeding the consensus estimate of $35 billion. Over the full year, the company spent $128 billion in capex. As mentioned earlier, Amazon expects capex to reach $200 billion in 2026, well above the $146.6 billion analysts were expecting. This figure surpasses the $175 billion to $185 billion guide from Alphabet and the $115 billion to $135 billion Meta that forecasted. "With such strong demand for our existing offerings and seminal opportunities like AI, chips, robotics, and low-earth-orbit satellites," Jassy said in the earnings press release, "we expect to invest about $200 billion in capital expenditures across Amazon in 2026, and anticipate strong long-term return on invested capital." Guidance Amazon's 2026 first-quarter guidance was mixed. The company expects net sales to increase 11% to 15% year over year to $173.5 billion to $178.5 billion. That midpoint of $176 billion beats the consensus of $175.6 billion. First-quarter operating income is expected to be between $16 billion and $21.5 billion. This midpoint of $18.75 billion was a big miss against the $22.18 billion. The company called out $1 billion of higher year over year costs in Amazon Leo, formally known as Project Kuiper, which is the company's broadband satellite business. Even without that, it was still a bad miss. Management has a history of under-promising and over-delivering, but they won't get the benefit of the doubt in a market that's punishing tech. (Jim Cramer's Charitable Trust is long AMZN, META, GOOGL, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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