Amazon Leads $1T Big Tech Rout as AI Bubble Fears Spark Sell-Off

Amazon stock falls on AI spending concerns

Amazon’s shares fell over 5% on Friday after the company’s expenditure projection startled investors, who were already concerned about the artificial intelligence boom becoming a bubble.

On Thursday, the e-commerce company joined Google, Microsoft, and Meta in announcing plans for significant capital expenditures.

Amazon, Alphabet, Microsoft, and Meta reported capital expenditures of around $120 billion in the fourth quarter alone. According to the Financial Times, that sum might rise to more than $660 billion this year, surpassing the GDPs of countries such as the United Arab Emirates, Singapore and Israel.

Wall Street has reacted differently to the businesses’ spending plans, celebrating Meta and Alphabet’s forecasts but punishing Amazon and Microsoft.

FactSet data shows that the valuations of Amazon, Microsoft, Nvidia, Meta, Google, and Oracle have dropped by more than $1 trillion in the past week. Amazon’s market capitalization decreased by just over $300 billion, the largest of any of the companies.

Shares of businesses building hardware for the AI buildout are likely to remain volatile as “sentiment contagion takes hold,” according to Paul Markham, investment director at GAM Investments.

“Questions over the extent of capex as a result of LLM build-outs, the eventual return on that, and the fear of eventual over-expansion of capacity will be persistent,” he added.

‘Investors scrutinize every angle in the AI race.’

Amazon said in its fourth-quarter earnings report that its capital expenditures are likely to reach $200 billion by 2026, which is more than $50 billion higher than analysts expected.

While management is confident in long-term investment returns, investors are concerned about the lack of visibility, according to Mamta Valechha, consumer discretionary analyst at Quilter Cheviot, on Friday morning.

“We have suddenly gone from the fear that you cannot be last, to investors questioning every single angle in this AI race.”

D.A. Davidson analysts downgraded Amazon’s stock to neutral from buy on Friday, citing concerns about its spending plans, risks to its cloud dominance, and the potential for artificial intelligence to damage its retail business.

“With the context of results from Microsoft and Google, we see AWS continuing to lose its lead and now scrambling to catch up through escalating investment,” the analysts wrote in a research note. “We are also increasingly concerned about Amazon retail’s transition to a new chat-driven internet dominated by Gemini and ChatGPT.”

Apple, on the other hand, has seen its stock rise 7% since Monday due to what CEO Tim Cook called “staggering” demand for the iPhone. Apple has previously invested significantly less on capital expenditures than other Big Tech companies and has been under fire from Wall Street about its AI strategy.

“The bet is becoming binary,” Michael Field, chief equity strategist at Morningstar, told CNBC, referring to the huge investments in so-called Magnificent Seven companies. “Either a big pay off if these investments come good, or a huge waste of shareholder’s cash if it goes wrong.”