Amazon Tumbles on AI Spending Fears: Buy the Dip?

Amazon shares fell about 4.6% on Thursday, even though the company itself didn't report any news. The selloff was triggered by earnings reports from other tech giants. Alphabet raised its 2026 capital spending plan to as high as $205 billion, and Tesla said its own capital spending would exceed $25 billion this year. This sparked a broad decline in big tech, with all of the 'Magnificent Seven' megacap stocks trading lower.

Amazon got caught in the downdraft because it has a massive AI spending plan of its own, with expected capital expenditures of about $200 billion for 2026. Alphabet's guidance raise came alongside negative free cash flow, reminding investors that these budgets can still grow. Amazon reports its second-quarter results on July 30, and the market spent Thursday pricing in the possibility that its capex number moves meaningfully higher.

The concern isn't hypothetical. Amazon's trailing 12-month free cash flow had already fallen to $1.2 billion as of the first quarter, down from $25.9 billion a year earlier. That's a dramatic decline that highlights the cost of heavy investment.

However, there's a positive side. Amazon Web Services (AWS), the company's cloud computing business, grew revenue 28% year over year in the first quarter to $37.6 billion. That was its fastest growth in 15 quarters, accelerating from 24% the previous quarter. The spending is buying acceleration, at least so far.

The stock now sits 16% below its 52-week high of $278.56 and trades at about 29 times earnings, which is arguably a modest multiple compared to several megacap peers. What could override Thursday's worry on July 30 is straightforward: AWS growth accelerating even more, and a capital spending plan that doesn't lurch higher.

This selloff matters because it highlights a key tension for Amazon and other big tech companies: the massive capital spending required for AI infrastructure is weighing on free cash flow and spooking investors. Amazon's free cash flow has plummeted from $25.9 billion to just $1.2 billion over the past year, raising questions about the sustainability of its investment pace.

For investors, the upcoming earnings report on July 30 is critical. If Amazon announces a capex increase that surprises to the upside, the stock could face further pressure. But if AWS growth continues to accelerate and capex remains in check, the selloff could be seen as an overreaction.

Amazon's competitive position in cloud computing is strong, with AWS growing at its fastest rate in 15 quarters. This growth is a direct result of AI demand, which is driving both revenue and spending. The key question is whether the spending will translate into sustained profitability or if it will become a drag on margins.

The broader tech sector is also affected. Alphabet's capex raise and Tesla's spending plans have reset expectations for the entire group. If Amazon follows suit, it could signal that AI investment is an arms race with no end in sight, potentially pressuring valuations across the sector.

On the other hand, Amazon's current valuation of 29 times earnings is relatively attractive compared to peers like Microsoft and Nvidia. If the company can demonstrate that its spending is generating strong returns, the stock could rebound sharply.