Amazon shares experienced a significant drop of over 9% on Friday following a startling announcement regarding the company’s capital expenditure forecasts. Investors were already on edge due to concerns that the rapid pace of investment in artificial intelligence (AI) might lead to a market bubble. The e-commerce giant revealed plans for a major increase in capital spending during its fourth-quarter earnings report, paralleling similar announcements from other tech powerhouses, including Google parent Alphabet, Microsoft, and Meta.
These four companies collectively reported approximately $120 billion in capital expenditures in the final quarter of the previous year. Projections suggest that total spending could surpass $660 billion in 2023, a figure that exceeds the gross domestic product of several nations, including the United Arab Emirates, Singapore, and Israel, as reported by the Financial Times.
Wall Street’s reactions to the announcements have diverged significantly among these tech firms. While investors responded favorably to Meta’s and Alphabet’s spending plans, Amazon and Microsoft faced backlash. Analysis from FactSet indicates that Amazon, Microsoft, Nvidia, Meta, Google, and Oracle have collectively lost over $1 trillion in market value in just the past week.
Paul Markham, investment director at GAM Investments, cautioned that shares in companies focused on AI infrastructure might continue to see volatility as a result of “sentiment contagion.” He highlighted that ongoing questions surrounding the necessity and outcomes of capital expenditures related to AI, as well as fears of over-expansion, could persist.
Amazon’s announcement included a forecast projecting capital expenditures of $200 billion by 2026, which was more than $50 billion above analysts’ expectations. This ambitious outlook has raised concerns among investors regarding the visibility of potential returns on such significant investments. Mamta Valechha, a consumer discretionary analyst at Quilter Cheviot, noted a shift in investor sentiment from fear of being left behind in the AI race to a more cautious examination of its implications.
Further complicating matters, analysts at D.A. Davidson downgraded Amazon’s stock from a buy to neutral, citing worries over the company’s ambitious spending plans, potential threats to its cloud business, and the risk that AI advancements may negatively impact its retail sector. They highlighted a growing concern that Amazon Web Services (AWS) could lose its competitive edge, necessitating escalating investments to remain relevant.
In contrast, Apple has benefitted from a notable surge in its stock, which rose by 7% since Monday. This increase appears to be driven by strong demand for the iPhone, with CEO Tim Cook referring to the situation as “staggering.” The investment landscape for technology companies is becoming increasingly polarized, with Michael Field, chief equity strategist at Morningstar, indicating that the stakes are high. The investments being made by these prominent firms may either yield substantial returns or result in significant losses for shareholders if they do not pan out as expected.
