Following Amazon‘s (NASDAQ:AMZN) fourth quarter earnings report, stocks saw a serious sell-off. Amazon shares now trade about 23% below their all-time highs, at just 25.8 times this year’s earnings estimates, which is near its lowest valuation in the modern era in terms of price-to-earnings ratio.
While revenue beat expectations in the fourth quarter, including a nice acceleration in Amazon’s web services business, the company’s massive $200 billion capital spending forecast for 2026 sent investors fleeing. After all, Amazon earned just $139.5 billion in operating cash flow in 2025, up 17% from the previous year.
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Therefore, barring a massive upward tilt, Amazon is likely to even post negative free cash flow in 2026. No wonder many conservative investors fled the scene.
However, in a recent interview, AWS CEO Matt Garman explained why investors shouldn’t worry. In fact, they should probably be hungry for news about this turbocharged expense.
Image source: Getty Images.
In a recent interview with CNBC’s John Fortt, Garman said:
Even with all this investment, my best estimate is that we will have limited capacity for the next two years. We will sell every server and every bit, and we will wish we had more. And that’s the state of the world for at least the next two years…
If Garman is even close to being right, then investors shouldn’t fear the $200 billion in spending. In fact, they should want Amazon to invest even more.
After all, many questioned Amazon’s past strategy of perpetual investment in growing its e-commerce distribution and fulfillment network, which consumed all of Amazon’s profitability in its early days. However, in the long term, that enormous physical footprint cemented Amazon’s moat as the undisputed leader of American e-commerce. Today, Amazon’s e-commerce division is profitable, reporting $35 billion in operating income last year, a 23% year-over-year increase.
The same was also said when Amazon started investing in AWS data centers, and now that business is even bigger than the e-commerce business in terms of profits, with $129 billion in revenue last year, an 18% increase, along with $45 billion in operating income.
If Garman is right and believes that Amazon will continue to be undersupplied after spending $200 billion largely on AI computing power, then Amazon should be able to charge an appropriate price for that computing.
Not only is all that spending not bad, it’s actually a sign of the best kind of business to have, according to Warren Buffett. In his 1992 letter to shareholders, Buffett wrote:
Leaving aside the question of price, the best business to own is one that over a long period of time can employ large amounts of incremental capital at very high rates of return. The worst business you can have is one that owes, or willpowerdo the opposite, that is, constantly employ increasing amounts of capital at very low rates of return.
While we’re not sure if Amazon is 100% guaranteed to earn high returns, the fact that Garman has said that Amazon still expects to be undersupplied for years means that it will likely be able to charge appropriate prices for everything it computes and generate appropriate returns. After all, AWS this year earned an operating margin of 35.4% in 2025, which is a really healthy margin. So Amazon will most likely generate high returns on that spend.
The other point Garman made in the interview was that those future revenues and profits are a much safer bet than their peers, because Amazon’s demand is diversified across many different types of companies. After all, Amazon is the pioneer in cloud computing and remains the largest platform today.
While other cloud companies have reported massive delays rivaling Amazon’s, a large portion of some companies’ delays are concentrated in a single customer: OpenAI. That’s why microsoft(NASDAQ:MSFT) and especially Oracle(NYSE: ORCL) didn’t get much credit for the huge order book increases revealed over the past six months; Future contracts with OpenAI accounted for a large percentage of that total. With investors now questioning whether OpenAI can fund its huge future commitments, vendors have faced skepticism from investors.
And while Amazon also services OpenAI, OpenAI’s total future commitment to AWS is only $38 billion, which is a relatively small portion of Amazon’s $244 billion backlog.
In the same CNBC interview, Garman explained that Amazon’s customer diversity reduces the risk of this new expense:
And that’s why others have some growth, very concentrated in some of these very large clients. And we have many of them, the OpenAI, the Anthropo of the world, who are also based on us. But I think we’re also very focused on the long-term health of the business on how to get all the startups building on AWS. How do we get all the banks? How do we reach all healthcare companies? How do we reach all retail companies? How do we get all manufacturing companies building on AWS in the cloud? And then, because of that and there, we see AWS win the vast majority of those times.
In the fourth quarter, Amazon Web Services’ year-over-year revenue growth rate accelerated from 20% in the third quarter to 24% in the fourth quarter. Given its huge investments scheduled for 2026, which Garman says will pay off in 2027 and even into 2028, AWS should see a needed acceleration in revenue and profits.
While this year’s spending may dampen the short-term performance of Amazon stock, long-term investors shouldn’t hesitate to buy with both hands. The bet is likely to pay off.
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Billy Duberstein and/or his clients have positions in Amazon and Microsoft. The Motley Fool positions and recommends Amazon, Microsoft, and Oracle. The Motley Fool has a disclosure policy.
AWS boss Matt Garman just delivered wonderful news to Amazon shareholders. Originally published by The Motley Fool.
