Amazon's $200B AI Bet Crashes Stock 5.6% as Cash Flow Vanishes

$200 billion. That's how much Amazon plans to spend in 2026—a figure so staggering it wiped $50 billion more than expected from the company's future cash flow and sent shares plummeting 5.6% to $210 on Friday.

When CEO Andy Jassy dropped this bombshell during Thursday's earnings call, he wasn't just announcing capital expenditures. He was declaring war in the AI arms race, even if it means Amazon's free cash flow essentially disappears.

The Numbers That Spooked Wall Street

The math is brutal. Wall Street had penciled in $37 billion in free cash flow for Amazon in 2026. But with capex jumping $50 billion above expectations, that cushion evaporates. Free cash flow—operating cash minus capital expenditures—will be virtually nonexistent.

Yet Amazon's fourth-quarter results were actually solid. AWS cloud growth accelerated to 24% year-over-year, the fastest pace in 13 quarters. The cloud unit's backlog hit $244 billion, up 40% year-over-year. Revenue and operating income both beat expectations.

So why the market panic? Because investors are struggling to see when this massive spending will translate into profits.

The AI Infrastructure Gamble

Jassy defended the strategy by highlighting Amazon's custom chip ambitions. The company's Trainium3 chips are seeing "very strong demand," with nearly all supply expected to be committed by mid-year. Customers are already expressing interest in Trainium4, still in development.

These aren't just chips—they're Amazon's attempt to reduce dependence on Nvidia while making AI workloads more affordable for AWS customers. It's a bold move, but one that requires enormous upfront investment with uncertain returns.

Jim Cramer remained bullish on CNBC's "Squawk on the Street," declaring "I have total faith. [Jassy] knows how to do this." But Wall Street analysts weren't as convinced, slashing price targets across the board.

The Competitive Reality Check

Here's what's keeping analysts up at night: AWS is losing ground to competitors. While Amazon's cloud unit grew 24%, Google Cloud surged 48% and Microsoft Azure expanded 39%. Yes, Amazon operates at a larger scale, but the gap is widening.

D.A. Davidson delivered the harshest verdict, cutting Amazon's price target from $300 to $175 and downgrading the stock to neutral. Their concern? Amazon isn't integrating major AI platforms like ChatGPT or Gemini deeply enough, instead focusing on its in-house assistant Rufus.

This could create a "structural disadvantage" in retail if consumers increasingly expect seamless AI integration across shopping experiences.

The Broader Big Tech Spending Spree

Amazon isn't alone in this capital expenditure explosion. Alphabet and Meta are also spending more than expected on AI infrastructure. The difference? Investors see clearer near-term returns on those investments.

Nvidia CEO Jensen Huang defended the spending spree on Friday, calling Big Tech's capex surge "appropriate and sustainable." Easy for him to say—his company is selling the shovels in this AI gold rush.

When asked about custom chips like Amazon's Trainium threatening Nvidia's dominance, Huang was dismissive: "No company can develop AI chips at the scale and quality like Nvidia."

Is this visionary leadership or reckless gambling? The answer may determine not just Amazon's fate, but the entire playbook for how tech giants should navigate the AI transition.