Amazon's $220 billion AI buildout turns free cash flow negative

Amazon's spending surge is tied directly to its position as the world's No. 1 cloud service provider. AWS already makes up more than 60% of the company's total operating income, and over the past couple of years AI products and services have supercharged its growth, since customers already using AWS for non-AI needs easily turned to it for AI as well.

That demand forced Amazon to invest in new data centers and equipment, and capex has been climbing. The company kept its capex forecast unchanged in the third quarter but had lifted it by $20 billion in the second quarter. CEO Andy Jassy said on the second-quarter earnings call that free cash flow headwinds would continue until the new data centers were up and running, noting that data center spending happens two years before the monetization happens, though monetization starts as soon as servers are plugged in.

The spending is necessary rather than reckless. It points to Amazon Bedrock, the company's inference service, as its fastest-growing multi-billion-dollar service, and argues that AWS' growth shows the AI investment has been worthwhile. With Amazon stock at 23x forward earnings estimates, it is a stock to buy and hold for the long haul.