Do Amazon and Alphabet's Combined $420 Billion in Capital Expenditures Make Sense?

Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are the two biggest spenders in the data center space. For 2026, Amazon projects spending about $220 billion. Alphabet is slightly behind that, giving investors a range of $195 billion to $205 billion, but it has also raised its guidance every quarter in 2026, so the actual figure may be much higher than the midpoint of $200 billion. In all reality, these two have nearly a blank check to get as much computing capacity online as possible, but that's a massive chunk of money that could have been used for other purposes.

In fact, if Amazon and Alphabet decided to pay investors a one-time dividend using that money, Amazon shareholders could have received $20.41 per share, and Alphabet investors would have received $16.40 per share. That's a huge percentage of their stock price, but would that have made sense? Let's take a look.

Image source: Getty Images.

Cloud computing is a thriving industry

Both Amazon and Alphabet have strong cloud computing businesses that require major investments to meet demand. At its core, cloud computing is just a rental business. When demand is high for renting, new capacity must be brought online, which isn't cheap. However, over the years, this investment pays off, often yielding many times the initial investment.

That's the same idea that dictates Amazon and Alphabet's spending on AI data centers, and as of right now, it appears to be paying off.

During the second quarter, Amazon Web Services (AWS), Amazon's cloud computing platform, saw its revenue growth accelerate to 37% year over year. That's the best growth in nearly five years, and it's far from done. During Amazon's conference call, CEO Andy Jassy noted that they don't have enough computing capacity to meet demand in 2026. He predicts that this trend will likely continue into 2027, which is why they're already seeing 2028 demand as well.

Clearly, there's a ton of interest in more computing capacity, which helps justify Amazon's major spending.

Alphabet is growing even faster, with its Google Cloud revenue climbing 82% year over year. Google Cloud is a smaller business, with revenue totaling $24.8 billion in Q2 versus AWS' $42.2 billion, which allows it to grow at a faster pace given its smaller starting base. Another factor boosting Alphabet's cloud division is the sale of its custom AI chips, which can deliver better performance at lower cost than traditional graphics processing unit (GPU) computing when workloads are properly configured. Alphabet expects to sell a lot of these next year, and this will be another boost to Alphabet's growth rate for the foreseeable future, potentially allowing it to reach triple digits.

Both companies are clearly growing at a rapid pace, justifying their investments, but does that make them good buys?

Amazon and Alphabet aren't cheap but are still solid buys

Neither of these two is what I would consider a cheap stock, but rarely do the best companies in the market trade at a discount. Instead, I want to see how these companies are projected to grow over the next year and whether it's a price tag worth paying. If 2027 earnings projections are used, these two trade at a reasonable price tag, with Amazon trading at a forward price-to-earnings (P/E) ratio of 25 and Alphabet trading at a forward P/E of 23 at the time of this writing.

AMZN PE Ratio (Forward 1y) data by YCharts.

That means there's probably about a year's worth of growth baked into each stock's price tag, which isn't unreasonable given how fast these two are growing. While they won't be the market's best performers in the future, I think they will easily outperform the market, making them strong stock picks now.

Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.