After delivering strong earnings but receiving mixed initial reactions, the hyperscalers are suddenly surging. Amazon (AMZN) and Microsoft (MSFT) have rallied roughly 20%–25% from their pre-earnings levels, while Alphabet (GOOGL) and Meta Platforms (META) have recovered sharply from their post-report lows. What began as another round of anxiety over runaway AI spending has quickly turned into renewed enthusiasm for the companies building the infrastructure behind the boom.
At the beginning of earnings season, however, investors were looking at these results through a very different lens.
Alphabet delivered what was, by almost any operating measure, an exceptional quarter. Revenue increased 24%, operating income climbed 30% and Google Cloud revenue surged 82%, with Cloud operating margins expanding to 35.6%. Yet investors focused overwhelmingly on the company’s $44.9 billion of quarterly capital expenditures and the resulting $5.9 billion free-cash-flow outflow.
Meta faced a similar reaction. Revenue increased 28% year over year, supported by a 14% increase in ad impressions and a 12% increase in average ad prices. But quarterly capital expenditures reached $31.1 billion, leaving the company with just $784 million of free cash flow, down from $8.5 billion a year earlier. Investors again treated the spending as the main story, overlooking the continued strength of the underlying business.
The central question hanging over the entire AI trade was straightforward: What kind of return can these companies ultimately earn on hundreds of billions of dollars of AI investment?
Until Amazon reported, the answer remained somewhat opaque. There were signs of accelerating demand across cloud, advertising and enterprise AI, but investors lacked a clear example connecting the enormous infrastructure buildout to both rapid revenue growth and expanding profits.
Amazon provided that example.
Second-quarter revenue increased 20% to $200.6 billion, while operating income surged 43% to $27.5 billion. More importantly, AWS revenue accelerated 37% to $42.2 billion, its fastest growth in 18 quarters, while AWS operating income jumped 64% to $16.6 billion. Despite the massive investment required to support that growth, the segment produced an operating margin of 39.4%.
The results underneath those headline numbers were even more revealing. Amazon disclosed that its AI business has surpassed a $25 billion annualized revenue run rate and continues to grow at a triple-digit percentage rate. Its custom-chip business, which includes Trainium and Graviton, has also exceeded a $25 billion run rate while growing at a triple-digit pace. AWS as a whole is now operating at a $169 billion annualized revenue rate.
