Both Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) fell following their Q4 results over the past few weeks. It wasn't for the strength each displayed in Q4; rather, it was because each company plans to spend a significant amount of money on artificial intelligence (AI) infrastructure in 2025.
Some investors would rather see that money returned to shareholders as dividends or stock buybacks, not reinvested in the business. While Alphabet spent a lot of money on share buybacks and dividends in 2024, it could have spent far more if it wasn't significantly spending on its AI capabilities. Amazon didn't spend a penny on share repurchases or dividends, so it clearly could have done more.
However, that's shortsighted thinking, and long-term investors should be cheering the spending on as it secures the future of the business rather than only focusing on short-term outcomes. Alphabet and Amazon have been thinking this way for a long time, so it should be no surprise to investors that they are acting this way.
I think there's one old adage that investors need to remember about Alphabet and Amazon. It will help them understand where these two are coming from.
Amazon and Alphabet will have a massive increase in capital expenditures in 2025
Alphabet and Amazon are planning to spend some serious dough on AI infrastructure this year. Alphabet plans on $75 billion in capital expenditures for 2025, while Amazon plans on around $100 billion. Compared to what these companies have spent over the past 12 months and what historical levels have been, this is an unprecedented amount of money being spent on capital expenditures.
Both companies have stated that the vast majority of this will be spent on cloud infrastructure, which is crucial to AI proliferation.
As the adage goes, you have to spend money to make money, and that couldn't be more true when assessing what Amazon and Alphabet are going to do in 2025. Amazon's CEO Andy Jassy makes it pretty clear as to why they are spending so much:
It's the way that AWS business works and the way the cash cycle works is that the faster we grow, the more capex we end up spending because we have to procure data center and hardware and chips and networking gear ahead of when we're able to monetize it. We don't procure it unless we see significant signals of demand. And so, when AWS is expanding its capex, particularly in what we think is one of these once-in-a-lifetime type of business opportunities like AI represents, I think it's actually quite a good sign, medium to long term, for the AWS business.
I couldn't have said it better myself (which is why I quoted it). In order to meet the coming demand, both Amazon and Alphabet have to get in front of it. Otherwise, potential customers will go to a different provider. This also signals strong growth over the long term, which is huge for both companies because these cloud computing businesses are absolute cash cows.
Cloud computing is a significant part of each company's financial picture
Many companies use cloud computing to power their computing infrastructure, as it allows them to scale up or down easily. This also keeps businesses asset-light, while the burden of purchasing computing power falls to the providers, like Amazon or Alphabet. It's also necessary for AI proliferation, as few companies have the year-round need for massive computing power required to develop an AI model.
This allows cloud providers like Amazon Web Services (AWS) and Google Cloud (Alphabet's cloud business) to charge a premium for using their computing resources, turning this business into a powerful subscription model.
In Q4, AWS posted revenue growth of 19% year over year and converted 37% of that into operating profit. While some may view AWS as a side business for Amazon, I like to think of Amazon as more of a cloud computing business than a commerce business. While AWS only made up 17% of Amazon's total sales in 2024, it accounted for an incredible 58% of Amazon's operating income. That shows how profitable cloud computing can be, making it a lucrative business for Amazon to invest in.
Google Cloud isn't as dominant as AWS, but it still provides a meaningful contribution to Alphabet's business. In Q4, Google Cloud revenue rose 30% year over year to $12 billion (for reference, AWS generated $28.8 billion in revenue) with an operating margin of 17.5%. Clearly, Google Cloud has some work to do before reaching AWS-like profit levels, but it is growing at a faster pace.
Google Cloud also doesn't contribute as much to the profit picture as AWS does, as Alphabet's primary business, advertising, has inherently higher profit margins than Amazon's commerce business. Still, if Google Cloud can maintain these growth levels for many years, it will become a substantial part of Alphabet's business.
Cloud computing is a massive trend that has yet to fully play out. The investments in this business allow every competitor to capture once-in-a-lifetime business opportunities (as Amazon's CEO Andy Jassy put it), so investors should be cheering on Alphabet and Amazon's hefty capital expenditures.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.
