Forget the Capex Fears: Why Alphabet and Amazon Are Must-Buys
Yahoo Finance ·
Cloud providers have started to peel back the onion on their cloud computing economics, and it's now easy to see why these companies are pouring money into AI infrastructure. Demand for their services continues to outstrip capacity, while they are getting very strong returns on their investments with quick payback periods. While Wall Street has feared this massive capital expenditure ( capex ), it should, in fact, be celebrating it. Let's look at why Amazon ( AMZN +1.77% ) and Alphabet ( GOOGL +1.79% ) ( GOOG +1.60% ) both look like great buys here. Amazon was the first company to discuss its cloud economics, saying that it was getting to breakeven on its server and networking equipment investments in less than three years. Meanwhile, its AI capacity is contracted out for at least five years, and its servers have useful lives of at least five to six years. It added that it is also finding ways to extend the useful lives of its servers and get to breakeven more quickly. It tends to get five to six generations of server economics in its data centers, which last more than 30 years, so the economics actually get better over time with fewer upfront costs. The tech giant plans to spend about $220 billion on capex this year and said that will still not meet the current demand it is seeing. It also expects to remain capacity-constrained in 2027 and said demand for 2028 is already massive. Its current backlog sits at $496 billion after more than doubling year over year. Meanwhile, the company believes AWS could become a $1 trillion business in the coming years. Amazon's economics also likely get better as it starts to use more of its custom chips.
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