Artificial intelligence remains the defining investment theme of this cycle, and few developments reinforce that view more clearly than the latest spending plans from Amazon (AMZN) and Alphabet (GOOGL). Both companies recently updated investors on their capital expenditure outlooks, signaling an aggressive push to expand data center capacity and AI infrastructure. Combined, the two technology leaders are expected to invest close to $400 billion this year to support the next phase of data center expansion.
Despite broadly strong earnings results, the market reaction has been mixed. Amazon shares pulled back following its report, even after only missing earnings estimates by a penny, as investors focused on the scale of planned spending. Skeptics have begun asking a familiar question: Are these companies committing too much capital to a still evolving technology?
While the headline figures are undeniably large, they represent less than half of one year’s revenue for businesses of this scale. More importantly, the investments are being directed at the cloud computing business segments, which are demonstrating a reacceleration in growth. When capacity comes online, it is being absorbed quickly, often immediately, suggesting that these companies are investing into visibility rather than speculation.
At a time when AI adoption is moving from experimentation toward operational deployment, Amazon and Alphabet look less like risk takers and more like infrastructure and applied technology for the modern economy.
Amazon enters this investment cycle from a position of strength. Its cloud division, Amazon Web Services (AWS), continues to serve as a cash cow for the company and a central pillar of the global AI ecosystem.
AWS recently delivered annual sales growth of 24%, a notable acceleration from the prior 20% pace. This reacceleration matters because it signals that enterprise demand is not cooling despite macro uncertainty. Instead, businesses are increasing spending as AI workloads transition from pilot programs to production environments.
Critically, AWS remains highly profitable, giving Amazon the flexibility to reinvest at scale without placing undue pressure on the broader balance sheet.
Another underappreciated development is Amazon’s rapid progress in custom silicon. In a relatively short period, the company has built a chip business exceeding a $10 billion annual run rate. By designing its own processors, Amazon improves margins while reducing reliance on third-party suppliers such as Nvidia. Vertical integration also enhances performance optimization, an increasingly important advantage as compute intensity rises.
Although the stock has lagged in recent years and is reacting negatively to near-term spending, Amazon arguably appears better positioned today than at any point in its history. After an extended period of sideways trading, the valuation has moderated even as growth remains durable. Shares currently trade around 28.2x forward earnings, well below the company’s five-year median.
The combination of improving fundamentals alongside a more reasonable multiple can create an attractive setup for long-term investors. Notably, the current narrative surrounding Amazon resembles the skepticism Alphabet faced just a year ago.
Alphabet was widely criticized not long ago as an AI laggard, with some analysts questioning whether generative AI could threaten its core search franchise. Those fears have largely failed to materialize.
Search remains resilient, and in many respects AI is enhancing user engagement rather than displacing it. Meanwhile, Google Cloud has emerged as one of the fastest growing hyperscale platforms in the market, expanding at an impressive 48% annual rate.
Like AWS, Google Cloud is not simply growing, but it is doing so profitably.
Alphabet’s strategic advantage extends beyond software. The company has leaned heavily into its custom Tensor Processing Units (TPUs), allowing it to run a significant portion of AI workloads on internally designed hardware. This approach supports margins, improves efficiency, and reduces dependency on external chip providers.
Perhaps most importantly, Alphabet possesses a financial structure that many pure-play AI firms cannot replicate. Competitors such as OpenAI and Anthropic must regularly raise capital to fund increasingly expensive training runs. Alphabet, by contrast, generates enormous cash flow and can largely self-finance its expansion.
That capability has helped reposition the company from perceived follower to clear leader. Today, Alphabet is widely viewed as one of the premier AI franchises, not just within the Magnificent Seven, but across the entire technology landscape.
Even after strong share-price appreciation, valuation remains relatively grounded. Alphabet trades near 29.9x forward earnings, above its five-year median but far from excessive given the company’s growth trajectory and strategic positioning.
Periods of heavy investment often create discomfort in the market, particularly when the technologies involved are still evolving. Yet history repeatedly shows that companies willing to build foundational infrastructure during adoption cycles tend to emerge with deeper moats and stronger competitive positions. Both Amazon and Alphabet did exactly that in the past, with digital ads and e-commerce, and appear to be following that playbook again.
Their cloud platforms are accelerating, profitability remains intact, and demand for AI capacity shows little sign of slowing. Meanwhile, the shift toward custom silicon should further support margins while reinforcing long-term strategic control.
Importantly, AI is not the only driver supporting these businesses. Core segments across advertising, e-commerce, enterprise software, and digital services continue to perform well, providing multiple engines of growth.
For investors, the takeaway is straightforward: this is not a case of choosing one winner over another. Amazon and Alphabet are increasingly functioning as both infrastructure providers and applied AI leaders, a rare combination that positions them at the center of one of the most significant technological shifts in decades.
Given their scale, financial strength, and expanding competitive advantages, there is little reason to doubt either company’s trajectory. If anything, the latest developments reinforce the view that both remain among the most compelling long-term opportunities in large-cap technology.
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This article originally published on Zacks Investment Research (zacks.com).
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