Amazon.com's Next Earnings Report on July 30 Could Sink the Stock. Here's Why.

The most interesting thing about Amazon (NASDAQ:AMZN) and its upcoming second-quarter earnings report isn’t the growth of its web-based retail store. It’s not even the continued growth of Amazon Web Services, the biggest cloud computing company in the world.

Instead, investors will be looking at Amazon’s spending, particularly on servers, storage, and other infrastructure to build out its AI footprint. Amazon previously announced it would spend a mind-boggling $200 billion on capital expenditures this year, and all signs point to that number rising when it reports earnings after the close on July 30.

Here’s why.

Image source: Amazon.

Wall Street is focused on AI spending

We are deep in earnings season, and one of the major themes so far has been spending by big tech stocks -- and the market’s negative reaction to that. Alphabet’s (NASDAQ:GOOG) (NASDAQ:GOOGL) second-quarter report on July 22 showed that it grew revenue by 24% to $119.79 billion, and its Google Cloud revenue jumped by 82% to $24.76 billion. But investors fixated on Alphabet’s announcement that it would increase its capex from $185 billion to $200 billion, which would match Amazon’s own plans. Alphabet stock fell 6% on the news.

Then there’s Tesla (NASDAQ:TSLA), another member of the Magnificent Seven grouping. Tesla doesn’t have a cloud computing business. Still, it is investing heavily in AI to develop and train AI models for its Optimus robots and full self-driving technology. Tesla also reported a big revenue spike in its Q2 earnings, up 26% year over year to $28.23 billion. But the company’s operating margins shrank to just 1.4%, adjusted earnings of $0.33 were far below expectations, and the company reported negative free cash flow of $1.1 billion in the quarter.

Tesla’s chief financial officer, Vaibhav Taneja, told analysts that the free cash flow shortfall was because the company’s capex more than doubled sequentially in the quarter, and would continue to grow in the second half of the year and through 2028. The company projected capex of $25 billion this year and announced plans to borrow up to $30 billion.

You can guess what happened next. The market shrugged off the revenue jump and focused on the shrinking margins, negative cash flow, and borrowing plans. Tesla’s stock has fallen more than 20% since its earnings report last week.

What to expect from Amazon’s earnings report

Amazon has had an up-and-down year, and the stock is just above water so far. But it’s far from immune to the challenges facing big tech right now, and Amazon stock already dropped 5% in the last week following the Alphabet and Tesla reports.

The best thing about Amazon for the last several years has been Amazon Web Services (AWS). Amazon has the largest share of the global cloud computing market at 28%, and it's been investing heavily as companies increasingly turn to cloud environments to train and run AI programs.

AWS generated $37.58 billion in sales in the first quarter, up 28% from a year ago. Operating income from AWS was $14.16 billion -- 59% of the entire company’s operating income.

Investors will want to see how Amazon improved, but the biggest questions will come from Amazon’s guidance, and whether the company raises its capex budget -- and by how much. CEO Andy Jassy has said Amazon will be a “meaningful leader” in AI. “We’re not investing approximately $200 billion in capex in 2026 on a hunch,” he said in April.

Tesla and Alphabet’s reports are important clues that AI spending is accelerating, not decreasing. There’s more evidence in the strong earnings reports of Taiwan Semiconductor Manufacturing, the world’s largest chip foundry, and ASML, which makes machines to create chips. Both companies recently raised their full-year guidance due to strong demand for AI infrastructure.

You also have the evidence from memory and storage companies, such as Western Digital, Sandisk, and Micron Technology, that are seeing huge increases in storage and memory products from data centers.

When you put all these data points together, you can make a reasonable hypothesis that Amazon will likely increase its capex again. Add that to another data point -- Amazon will likely see negative free cash flow (FCF) this quarter, as its trailing 12-month FCF fell to $1.2 billion in Q1, down 95% from a year ago.

Any combination of Amazon raising capex, showing negative free cash flow, or taking on new debt -- could pressure the stock. If all three happen, as they did with Tesla -- then Amazon shareholders could have a very rough day.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Micron Technology, Taiwan Semiconductor Manufacturing, Tesla, and Western Digital. The Motley Fool has a disclosure policy.