Magnificent 7 companies report earnings after closing bell, but AI concerns grow
Amazon’s latest quarter delivered what many portfolio managers say they want from a mega-cap technology: strong revenue growth, a reacceleration of its cloud franchise, and detailed plans for its artificial intelligence infrastructure. Market reaction on Thursday suggested something more complicated.
The company reported fourth-quarter 2025 sales of $213.4 billion, up 14% year-over-year and slightly above Wall Street’s estimates of about $211 billion. Net income rose to $21.2 billion, or $1.95 per share, slightly higher than last year’s $1.86, but just short of consensus estimates of around $1.97.
The Wall Street Journal noted that a combination of missed profits and a surprisingly aggressive investment plan caused the stock to drop 8% to 10% in after-hours trading, even though Amazon had the strongest growth in its core business since before the Fed’s tightening cycle began.
The reaction centers on numbers that are likely to be a big problem for institutional investors right now, and which Amazon President and CEO Andy Jassy highlighted in his earnings call. “The demand for our existing products and creative opportunities, including AI, chips, robotics and low-orbit satellites, is so strong that we expect to invest approximately $200 billion in capital investment across Amazon in 2026, with strong long-term returns on invested capital.”
The $200 billion would be a significant increase from this year’s estimated $125 billion in capital spending, but Jassy’s statement sought to justify the spending.
“AWS is growing 24% (the highest growth in 13 quarters), advertising is growing 22%, stores are growing strongly in North America and internationally, and our chip business is experiencing triple-digit year-over-year growth. This growth is happening because we continue to innovate at a rapid pace and continue to identify and solve customer problems,” he said.
Under the headline spending numbers, the business story was mostly solid. Amazon Web Services’ fourth-quarter revenue rose 24% year over year to about $35.6 billion, the fastest pace in 13 quarters and beat expectations of about $35 billion. AWS operating income rose to $12.5 billion from $10.6 billion a year earlier, highlighting that cloud remains a profit driver that funds Amazon’s broader business.
At the consolidated level, operating income increased from $21.2 billion to $25.0 billion, despite more than $2.4 billion in special charges related to European taxes, severance and physical store impairments. Excluding these items, operating profit should reach $27.4 billion.
For the full year, sales rose 12% to $716.9 billion, and net income jumped from $59.2 billion to $77.7 billion. Operating cash flow increased 20% to $139.5 billion. However, free cash flow fell sharply from $38.2 billion to $11.2 billion, almost entirely due to an approximately $50.7 billion increase in spending on property, plant and equipment “primarily” due to AI-related investments.
The disconnect between strong profitability and deteriorating free cash flow is at the heart of the current AI investment debate. For allocators who have used free cash flow yield as a key discipline in estimating their exposure to the Magnificent Seven, Amazon is now asking for patience.
Investors are already concerned about the scale of investment in AI, and the risk is not just that one company will overspend, but that the entire ecosystem will invest ahead of actual monetization, undermining profits for the group as a whole.
Amazon’s comments make clear that the company’s AI ambitions extend beyond cloud computing and custom silicon to robotics and satellite connectivity.
To allocators, that breadth may look like single-issuer diversification, but it also looks like concentration risk at the portfolio level. Many balanced growth mandates already place heavy weight on a small number of AI-centric platforms. Amazon’s huge capital spending plans further intensify the question of how much “AI infrastructure risk” a diversified portfolio should take on relative to a benchmark.
For long-term investors, the question is less about Amazon’s ability to grow in the AI space and more about timing and execution risk. If AWS growth maintains its recent pace, advertising continues to compound at double digits, and post-pandemic restructuring gains sustain retail margins, the return on today’s capex in 2026-27 could be substantial. If a company adopts AI more slowly than expected or is less competitive on price, the same spend can compress profits for years.
