Amazon learns a tough lesson in a market bailing on tech. Why we must be patient

Amazon shares fell Thursday evening after the tech giant announced a $200 billion capital spending plan for this year. Additionally, missing management's current quarter earnings forecast cast a shadow over an overall good final quarter of 2025. Revenue rose 14% year-over-year to $213.39 billion, beating expectations of $211.33 billion, according to estimates compiled by LSEG. Generally accepted accounting principles (GAAP) earnings per share rose 5% to $1.95, missing the LSEG forecast of $1.97 per share. Operating income increased 18% year over year to $24.97 billion, beating the $24.77 billion consensus estimate. Amazon's operating income included three specific charges that negatively impacted operating income by approximately $2.4 billion. Why we have it Amazon may be widely known for online shopping, but it's its cloud business that really makes its living. Advertising is another fast-growing industry with high margins. Investment in strong e-commerce logistics infrastructure makes your online store the place to be. Prime uses free shipping and video streaming, as well as tons of other perks to keep users paying every month. Competitors: Walmart, Target, Microsoft, and Alphabet Last purchased: April 15, 2025 Start: February 2018 Bottom line: Let's explain why Amazon shares are down nearly 11% in after-hours trading, further extending the marketwide decline as the Magnificent Seven and other tech stocks sell off this week. Here's the thing: the reported fourth quarter of 2025 was actually solid. Bulls wanted Amazon Web Services revenue growth to accelerate, and the company delivered. The segment reported revenue growth of approximately 24% and added approximately $7 billion in revenue year over year. The cloud segment also delivered better-than-expected margins; This is a great achievement because management needs to balance profitability with investments. This is a sign that almost no capacity is wasted. Whatever is added is used. The company's North American and International units also reported year-over-year margin gains in the quarter, excluding certain expenses. So why is the market rebelling against Amazon? While management is aiming for $200 billion in capex this year (about $50 billion more than analysts had predicted), Wall Street is worried those investments won't be monetized and turn a profit quickly enough. AMZN 5Y mountain Amazon 5 year We've seen other Mag 7 companies talk about increasing investments this earnings season — including other portfolio names Meta Platforms and Alphabet, both of which got a pass. Why not Amazon? The market has been plagued by higher costs that have not been accompanied by further increases in its 2026 first-quarter revenue and profit guidance. If you're going to spend more than everyone expects, it needs to be backed by higher returns. Still, Amazon is not wasting this capital, it is investing in the future and would not have spent this money if there were no demand signals. Otherwise it would be carelessness. CEO Andy Jassy touched on this issue during the earnings call, saying: "We have deep experience in the AWS business understanding demand signals and then turning that capacity into strong returns on invested capital. We're confident that will be true here." This demand was also supported by figures. AWS ended the quarter with a backlog of $244 billion. That was up 40% on a yearly basis and 22% on a quarterly basis, and was several billion dollars more than the $240 billion cloud backlog Alphabet reported in its quarterly results Wednesday evening. Amazon believes its aggressive spending will deliver a strong long-term return on invested capital, and we have little doubt about that decision. Jassy said that "customers really want AWS for core and AI workloads" and that the business is "monetizing capacity as quickly as we can build it." Assurances aside, the market has no patience right now and will not take a leap of faith. But as investors who believe in Amazon in the long run, we are willing to wait. Is the big post-earnings stock drop disappointing? Of course it is. Shares are back to May 2025 levels. While we reiterate our buy-equivalent 1 rating, we have no choice but to lower our price target from $275 per share to $250 to account for increased investments and technology sales. Comment Amazon Web Services' (AWS) cloud revenue grew 23.6% year-over-year to $35.58 billion, beating estimates by nearly $514 million. The consensus growth estimate was around 21.8%. The quarter recorded a significant growth acceleration of 20.2% compared to the previous quarter. This was also the fastest growth rate in the last 13 quarters. Operating income and margin were also positive surprises. While heavy investments caused margins to fall 190 basis points year-on-year to 35.03%, this was still better than the consensus estimate of 33.98%. “AWS currently has a $142 billion annual run rate, and our chip business, including Graviton and Trainium, is now over $10 billion in annual revenue run rate, growing by triple-digit percentages year over year,” Jassy said during the call. Custom chips have been a major focus of hyperscalers, including Alphabet, looking to reduce reliance on Nvidia. While Nvidia's all-purpose chips are the gold standard for running and training AI, they are expensive and difficult to obtain. Amazon and others are investing in their own silicon, incurring upfront costs but aiming to deliver cheaper computing. As for the company's remaining business segments, there were solid revenue increases in the Other category, which includes Online Stores, Subscription Services, Advertising Services, and businesses not included in other segments such as healthcare, licensing, and co-branded credit cards. Only Physical Stores and Third-Party Merchant Services missed the consensus estimate. By geography, North American sales rose 10% to $127.08 billion but missed the consensus estimate by $149 million. Reported operating margin increased 102 basis points year over year to 9.03%, beating estimates of 8.51%. In the international segment, revenue increased 17% year-over-year and beat consensus forecast. Reported operating margins fell 98 basis points to 2.05%, missing expectations of approximately 3.96%. However, the segment was negatively impacted by the previously mentioned $1.1 billion in special charges. Without this impact, operating margins would have increased year over year. On the CapEx side, Amazon invested nearly $39.5 billion in the fourth quarter, beating the $35 billion consensus estimate. For the entire year, the company spent $128 billion on capital expenditures. As previously mentioned, Amazon expects capex to reach $200 billion in 2026; This is well above the $146.6 billion analysts expected. That figure exceeds Alphabet's guidance of $175 billion to $185 billion and Meta's forecast of $115 billion to $135 billion. “With such strong demand for our existing offerings and seminal opportunities such as artificial intelligence, chips, robotics and low-orbit satellites, we expect to invest approximately $200 billion in capital expenditures across Amazon in 2026 and expect strong long-term returns on invested capital,” Jassy said in the earnings press release. Guidance Amazon's first quarter 2026 guidance was mixed. The company expects net sales to increase 11% to 15% annually to $173.5 billion to $178.5 billion. The $176 billion midpoint is superior to the $175.6 billion consensus. First-quarter operating income is expected to be between $16 billion and $21.5 billion. That midpoint of $18.75 billion was a big loss compared to $22.18 billion. Costs at Amazon Leo, the company's broadband satellite business formally known as Project Kuiper, rose $1 billion year over year, the company said. Even if that didn't happen, it was still a bad miss. Management has a history of under-promising and over-delivering, but they won't get the benefit of the doubt in a market that punishes technology. (Jim Cramer's Charitable Trust is long AMZN, META, GOOGL, NVDA. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. 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