Amazon Is More Vulnerable Than You Think
Key Points
The stock’s run-up is largely justified because Amazon can show that its investments are paying off.
Amazon Web Services is the industry leader in non-AI cloud computing.
But artificial intelligence (AI) data centers are fundamentally different from those for general IT needs.
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Amazon (NASDAQ: AMZN) stock hit an all-time high on April 24, up 26.8% since the start of the month. When stocks rise sharply in a short period, they can seem impenetrable and foster a sense of security. But Amazon's business has cracks forming below the surface.
Here's why Amazon is more vulnerable than you may think, why it could still be a solid long-term buy, and why some investors may want to pass on buying the growth stock now.
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Amazon is gaining more control over its supply chain
Amazon's stock price is up largely due to blockbuster deals with hyperscalers like Meta Platforms and Anthropic, the maker of Claude artificial intelligence (AI) large language models. These companies are committing to using Amazon's custom chips and infrastructure, which is exclusive to Amazon Web Services (AWS) customers.
Amazon has invested heavily in custom AI chips, dedicated hardware, development tools, and application services to cut costs, boost efficiency, and reduce reliance on suppliers such as Nvidia. The strategy is working, but it comes at a high price.
Amazon was pressured to invest aggressively in AI
Periods of rapid change can be catastrophic for incumbent leaders in an industry. Examples of this include Netflix pushing Blockbuster to bankruptcy, Apple overtaking BlackBerry, or Alphabet-owned Google becoming the dominant search engine.
AWS has been the leader in cloud computing infrastructure for years. But the bulk of existing AWS data centers serve general computing, storage, and database needs rather than AI. AI data centers are fundamentally different from general IT needs, requiring advanced chips, specialized networking, and significantly more energy.
AI effectively forced a global infrastructure shift, requiring established hyperscalers like AWS, Microsoft Azure, and Google Cloud to redesign and build new data centers, upgrade power infrastructure, add liquid cooling, and install new networking and chips. Since AI workloads require different hardware and data center designs than traditional cloud computing, the surge in AI demand provided a serious threat to established players. And no company felt that threat more than AWS.
The boom also gave AI-native data centers, like those built by CoreWeave, an opportunity to establish a niche position in the value chain. And on a larger scale, Oracle (NYSE: ORCL) Cloud Infrastructure is using brute force to challenge cloud leaders by bringing around 72 multicloud data centers online in a few years.
In January, Oracle said it has 147 active data centers and 64 more on the way. Oracle is lowering costs and boosting margins by standardizing the configuration of its data centers, effectively churning out assembly line-style AI factories. It's relying on debt and burning through cash to hit these targets, which is taking a severe toll on its balance sheet.
Similarly, Amazon is throwing money at infrastructure investments to ensure it doesn't lose market share. Amazon forecasts $200 billion in capital expenditures in 2026, which will almost certainly result in near-term negative free cash flow and strain its profitability.
A bold bet in AI
AI has been a boon for cloud computing infrastructure, but it has brought its fair share of challenges for AWS, as its existing infrastructure wasn't suited to handle AI workflows. Due to supply chain disruptions and the AI energy bottleneck, Amazon made capital-intensive investments to build custom chips and networking infrastructure to lower costs and scale its AI data centers.
Now at an all-time high, Amazon will have to prove these investments are worth it by converting spending into earnings and free cash flow growth in the coming years. Record spending makes Amazon's investment thesis riskier than in the past, so it is best suited for investors with a high risk tolerance and strong conviction in its vision.
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Daniel Foelber has positions in CoreWeave, Netflix, Nvidia, and Oracle and has the following options: short May 2026 $175 calls on Oracle. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, and Oracle. The Motley Fool recommends BlackBerry. The Motley Fool has a disclosure policy.
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