Amazon & Google Stock: AI Bubble Beginning to Pop or Deal of the Year?

Amazon and Google stock drop after earnings

0:00 Amazon stock fell almost 7% after hours on Thursday to $227, just one day after Alphabet, Google's parent company had its worst day since going public down more than 12%. And here's the strange part, both companies just showed their AI businesses are booming. Amazon's cloud grew nearly 40%. It's fastest in almost five years, and Google's cloud more than doubled. So why is Wall Street dumping the winners? In full disclosure, I own Amazon stock and I bought more after this report.

0:24 My own, Roth IRA, dropped about 4 grand in one day, so I'm feeling this too. But even if you think this whole AI boom is a bubble, stick around, because the number that scared Wall Street is real and it's not the one in the headlines.

The pizza shop: what AI capex really is

0:35 Picture a pizza place with a line out the door every single night. The owner wants to sell more pizza, so he buys 10 new ovens and doubles the size of his kitchen. His sales are up, his customers are happy, and his bank account just went negative. That's Amazon and Google right now. Except their ovens are data centers. Amazon plans about 220 billion of capital spending this year, mostly for AI and Google up to 205 billion. Capital spending or CapEx basically just means money spent on stuff that lasts for years, like building servers and chips.

1:01 Wojak saw the oven bill and sold before reading why.

Amazon Q3 earnings: sales, Prime Day and the World Cup

1:04 So let's start with what actually happened at Amazon. It brought in 201.9 billion in sales this quarter up 12%. Wall Street wanted about 202.2 billion, so it missed by less than 0.2%. And that 12% comes with an asterisk. This year Amazon moved Prime Day out of this quarter into the one before it in most big countries, to avoid clashing with the World Cup. Amazon says growth would have been about 4 points higher without that shift. Blame the World Cup, not the shoppers.

1:29 Profit is where it gets interesting. Amazon earned $1.89 a share against about 1.96 expected. less than 1.95 it made a year ago. Now that looks bad until you read the footnote. A year ago, Amazon's profit included a $9.5 billion gain on its stake in Anthropic, the AI company. That's an investment going up in value, not Amazon selling more stuff. As a CPA, I'd skip past that and look at operating income, which is a profit from actually running the business.

1:53 It jumped 61% to $28.1 billion, and nearly $0.14 of every sales dollar was profit. 's the best margin Amazon has ever had.

AWS growth and the $578B backlog

2:01 The star was AWS, Amazon's cloud business, which basically just rents out computing power to other companies. It brought in 46 billion up nearly 40 percent and it's now on pace for 184 billion a year. Here's why that matters so much. AWS has less than a quarter of Amazon's sales, but it made more than 60 percent of Amazon's operating profit this quarter. AWS also had a backlog of 578 billion. That's what customers have already signed contracts for, but Amazon hasn't delivered yet.

2:24 That's the line out the door. And CEO Andy Jassy says he believes AWS can grow more than 40% a year in both 2027 and 2028. But AWS wasn't the only bright spot. North American sales grew only 6%, partly because of that prime day shift. The operating profit there jumped from 4.8 billion to 8.7 billion. Faster delivery is a big reason. Amazon says more than 1.5 billion items reach prime members same day or overnight this quarter. It's fastest delivery speeds ever for this time of the year.

2:50 That profit is paying for some wild side bets. And they're getting real. Zoox, Amazon's Robotaxi company started charging for rides in Las Vegas and actually visited recently and saw this. And it's Leo's satellite internet is on track to start service later this year. Boomer still thinks Amazon is a bookstore. But there was a soft spot advertising. grew 11% down from 26% the quarter before. Amazon blamed Prime Day timing again and expects ad growth to bounce back to the high teens next quarter.

3:14 For the holiday quarter, Amazon guided to 240 billion to 247 billion in sales and more operating profit than last year's holiday quarter, even at the lower end of its range. None of this sounds like a company in trouble.

What actually scared Wall Street: free cash flow

3:25 So here's what actually scared Wall Street. Free cash flow. cash a company has left after it pays for everything, all those new ovens. Over the last 12 months, Amazon's free cash flow was -42.4 billion. A year earlier, it was positive 14.8 billion. That's a $57 billion swing in one year. The reason is spending. Amazon spent about $211 billion on property and equipment over those 12 months, nearly double the year before, and it says the increase is mainly from AI.

3:50 To help pay forward, Amazon's long-term debt went from about $66 billion at the start of the year to more than $170 billion. Now here's the part most people miss and it's the accountant in me talking. When Amazon buys a server, the cash leaves all at once, but the cost hits profit slowly, a slice at a time over several years. Say the pizza place makes 100 grand a year before the ovens. The ovens cost 150 grand, paid in cash for this year, but the accountant spreads that cost out at about 25 grand a year.

4:15 On paper, profit is still 75 grand, but the bank account is down 50 grand. And so when you were building as fast as we're building with so many data centers simultaneously, you're going to spend a lot of capital and your free cash flow is going to have headwinds in those years. That's how you get record profit and negative cash flow at the same time.

Amazon is not slowing down: AI chips every 14 seconds

4:34 And Amazon isn't slowing down. On the earnings call, Jassy said Amazon is installing an AI accelerator, basically an AI chip about every 14 seconds and customers are using that capacity almost as fast as it goes in. The ovens are full the minute that they're plugged in. Last week on a podcast with Andreessen Horowitz, Jassy went even further. He said 2026 is sold out 2027 is largely sold out and a good chunk of 2028 is sold out to even spending $220 billion a CapEx this year.

5:01 We're leaving a meaningful amount of demand on the table. Demand is so strong that Amazon plans to start selling its own AI chips called Trainium outside of AWS late in 2027, the same move Google made with its own chips. That would put Amazon more directly up against Nvidia. Jassy also pointed out that about 85% of the world's IT spending still isn't in the cloud, so in his view, this is still early. So the bull case is simple. The demand is real.

Alphabet: negative free cash flow and Microsoft

5:24 But Amazon wasn't the first giant to scare investors this week. Alphabet reported on Wednesday night, missing estimates on both sales and profit. And on Thursday, it stock fell more than 12%, erasing roughly 500 billion in market value in a single day. In the AI part, look great. Google Cloud revenue more than doubled. It's backlog grew to about $561 billion, and Google says that Gemini app now has 1 billion users. So far, same story as Amazon. But Google has a problem Amazon doesn't.

5:49 Search revenue grew 12% down from about 17% at the quarter before. And Google said part of the reason is people using AI mode. chatbot style search which doesn't make as much money from ads yet. In other words, Google's AI might be eating Google's lunch. They really have no choice though. The AI revolution is on and it's a race and people are competing and they have no choice but to adopt AI or they're going to get left behind. Then the cash. This quarter alphabet spent about 51 billion on data centers and equipment, but its business only brought in about 42 billion in cash.

6:17 So free cash flow is negative about 9 billion. of $9.1 billion in a third quarter driven by our investments in CapEx. That's the second quarter in a row of negative free cash flow. After 22 years as a public company without a single one, an alphabet says spending will go up significantly in 2027. Two of the world's biggest money machines are actually spending more cash than they're even bringing in. Microsoft reported the same night, showed positive free cash flow, and it's not held up far better.

6:44 So this week Wall Street isn't punishing AI, it's punishing AI that doesn't pay for itself yet. Doomer says this is the dot-com bubble all over again. Chad says it's the sale of the year. Zoomer agreed with both of them before lunch.

The bear case: is the AI bubble popping?

6:56 So who's right? Let's be fair to both sides, starting with negative Nelly, because her case is serious. Remember those server slices? With this much building, they pile up fast. Amazon's depreciation amortization, the wear and tear cost was about 21 billion this quarter, up from about 17 billion a year ago, and it keeps climbing as new data centers come online. And if AI demand cools off or chips get cheaper, faster than expected, all those data centers could earn less than Amazon and Google are counting on.

7:20 There's also a risk to Amazon's store. Analyst Gene Munster warned this week that AI shopping assistants could become a serious threat to Amazon's retail business, starting in the back half of 2027. And all that borrowing has a cost. Amazon's interest expense, this quarter was about 1.7 billion up from about half a billion a year ago. Building too much of a good thing is how booms go bust.

The bull case and the dot-com history

7:40 Positive Pete's case is just as simple. These companies aren't building ovens and hoping customers show up. Amazon has 578 billion in sign contracts and Google has about 561 billion. This quarter alone, AWS signed new deals with companies like Meta, NVIDIA and OpenAI. And Jassy says Amazon may have two trillion-dollar revenue businesses within the next 5-10 years. no company has ever had even one. Amazon's answer to AI shopping bots is its own, Alexa for shopping, which Amazon says more than 400 million customers used over the last 12 months.

8:09 And unlike a lot of dot companies, these businesses are very profitable. Amazon made 28.1 billion in operating profit this quarter, even while spending like this. The ovens are expensive, but that line, it's real. Amazon has also been here before. After the dot com crash, Amazon stock felt more than 90%. And critics warned it was burning through too much. too much cash. The warehouse is kept building turned into a delivery network that now gets stuffed to your door overnight.

8:32 History doesn't promise to repeat, but this playbook is not new.

Is Amazon stock on sale? Analyst targets

8:35 So, is this a sale? Here's the opportunity angle. Before the report, the average analyst price target on Amazon was about 46% above the after-hours price, according to Yahoo Finance. But this isn't a bargain-bin stock either. Even after the drop, Amazon is worth roughly 2.5 trillion. Price targets are opinions with a decimal point. So, be careful with that number, those targets were set before this report and analysts often trim them after a miss, so expect some to come down this week.

8:58 Chad bought Amazon when everybody hated it and he's adding a little more. Zoomer bought calls this afternoon right before the report. Only one of them is sleeping tonight.

Why I bought Amazon stock today

9:06 In full disclosure, I'm basically chad in this story in this limited context. This morning I put almost 6 grand for my Roth IRA into Amazon. That's about 25 shares at just under $240 each. the time I bought the stock had already clawed back most of that after hours drop. It was down only about 2% on the day, so I didn't get the $227 price. Wojak got that one. Why buy? Because of everything in this video. A $578 billion backlog, a cloud business growing nearly 40% and AI chips going in every 14 seconds that customers use almost as fast as they're installed.

9:36 The line out the door is real and I'm betting the ovens pay for themselves. I bought it in a Roth IRA so if this works out the gains come out tax-free in retirement. As an accountant by trade that's my favorite kind of footnote. Wojak sold at 227. I just bought under 240 and neither one of us knows who is right yet. This isn't a tip, it's a receipt. So here's what I'm watching from here. First, AWS Grove. If it stays near 40% next quarter while all that new capacity comes online, the ovens are paying for themselves.

10:02 Second, free cash flow. spending. this big can't grow forever. If AWS keeps growing once the spending level is off, that negative number can turn around fast. If it keeps getting worse, Nellie was right. Next, Google Search. If those AI mode ads start making real money, Google's biggest worry fades. If search keeps slowing, the AI really is eating the core business. And last, your own portfolio. If you own an S&P 500 index fund and these stocks on the side, you're making the same bet twice.

10:26 You do buy the dip, buying in pieces over a few months means you don't need to nail the bottom. Amazon already bounced back from that after hours low yesterday, but where it goes from here? Nobody knows.

My verdict

10:35 Here's how I read it. Amazon and Google didn't break this week. They're spending like never before, and Wall Street wants proof the money comes back before it pays the full price. The line out the door is real, but so is the bill for the oven. Tell me in the comments, AI bubble beginning to pop or deal of the year. two picked this next one for you, and it won't even cost you a single oven.