Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting Club
PRO
LivestreamMenuEvery weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Stocks are higher Friday, keeping the S & P 500 on pace to end a volatile week in positive territory. Chipmakers and other AI infrastructure stocks are posting gains for the second straight day after Amazon raised its capital spending outlook and reinforced a healthy AI demand environment (more on that below). But the rally is also being supported by a cleaner technical backdrop, as the leverage that fueled several weeks of forced selling in popular AI stocks has largely been removed from the AI trade, creating a clearing event that may have marked at least a short-term bottom in the theme. On Friday’s Morning Meeting, we mentioned a quote from Amazon CEO Andy Jassy on last night’s earnings call that made investors feel much more comfortable about the company’s aggressive AI infrastructure investments. As promised, we’re following up here with the full quote and an explanation of why it matters so much. Here’s Jassy: Earlier this year, we said we plan to invest approximately $200 billion in cash capex in 2026, the majority of which to support AI and AWS. At this level of spend and higher, we have clear line-of-sight to strong financial returns. I’ll explain why. There are two major parts of the investment: the data centers, and the servers and networking equipment that go into them. These have different capital cycles. Data center capital is spent starting two years before we can put servers into them to start monetizing. Once a data center opens with servers plugged in, we start generating significant revenue right away and then get to monetize these data centers for 30-plus years without having to spend that start-up capital again. Servers and networking equipment operate on a shorter cycle. We typically purchase these a few months before putting them into service, so we have strong visibility into customer demand before we trigger the spend. If the demand isn’t there, we won’t spend the capital. For servers and networking equipment, on average, it takes a little less than three years to break even on that investment. The servers currently have a useful life of at least five to six years, and most of our AI capacity these days is being contracted for at least five-year terms. That means that we’re driving significant free cash flow on the servers and network of equipment in the two to three years after we break even. Those two sentences were the key comments that helped change the perception around Amazon’s AI spending. Sure, Amazon’s AI buildout requires a massive upfront cash outlay, but the combination of multi-year customer contracts and servers that remain productive well beyond the breakeven point gives management greater confidence in the returns on those investments. It reinforced that today’s heavy capital investments are not a permanent drain on cash flow, despite soaring hardware costs. In other words, there is light at the end of the tunnel, and it may be closer than many investors had anticipated. Here’s more from Jassy: It’s also worth noting that AWS has a strong track record of pulling forward breakevens on server equipment, where we’ve already made meaningful progress and finding ways to extend the useful life of this equipment without sacrificing customer experience. So for our data centers, which have 30-plus-year useful lives, we should get at least five to six generations of server economics, like I explained earlier, with subsequent generations after the first having even better overall economics because we don’t have to repeat that upfront data center investment I mentioned earlier. This means in the short-term, when demand is necessitating so many data centers being built simultaneously in advance of when we can start monetizing them, we’ll spend a lot of capex and encounter free cash flow headwinds until these data centers come online, can be monetized and we get a few years into these servers being utilized. Then, as we get a few years out and the revenue growth outpaces the incremental capex growth, which will happen at some point, the resulting revenue, free cash flow and return on invested capital is very compelling. We’ve done this before in the first era of cloud computing just over a longer time horizon, where demand built more gradually than it has in AI. Investors entered this week demanding more clarity on the economics behind the hyperscalers’ massive AI investments. If companies were going to raise capital spending expectations, they needed to explain not only what they were investing in, but also the expected payback period and why they had confidence those investments would generate attractive returns. We still believe the hyperscalers should avoid damaging their balance sheets by taking on excessive debt, burning through cash, or, as a last resort, issuing equity to fund these investments. For now, however, Jassy’s explanation helped ease those concerns by providing investors with a clearer line of sight into the cash-flow profile and returns Amazon expects from these AI infrastructure investments. Next week is still a busy one of earnings with about a quarter of the S & P 500 scheduled to report. Within the portfolio, we’ll hear from Qnity Electronics and DuPont before the opening bell on Tuesday, Eli Lilly before the opening bell on Wednesday, and Honeywell Aerospace after the closing bell on Wednesday. It’s also an important one for economic data. Starting Monday, the economic calendar picks up with the Institute for Supply Management’s (ISM) monthly look at manufacturing activity. Tuesday brings factory orders, durable goods orders, and the so-called JOLTS report, which captures job openings and the number of workers who left their roles. Wednesday features ADP’s private payrolls and ISM’s monthly services index, followed by outplacement firm Challenger’s job cuts data on Thursday. The week wraps up Friday with the closely watched July nonfarm payrolls report. The economy is expected to have added 65,000 jobs in July, according to economists polled by FactSet. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.Read More
About The Author
