When Amazon (AMZN +3.47%) announced its fourth-quarter earnings in early February, it shared the usual financial metrics everyone looks for: revenue came in slightly above expectations; earnings per share narrowly missed expectations. Overall, it was a strong earnings report with positive signs from its important cloud computing business, Amazon Web Services (AWS).

But investors punished the stock for one clear reason: Management announced plans to spend a whopping $200 billion on capital expenditures (capex) this year. That’s an increase of more than 50% year over year and more than any other company.

Management expressed high levels of confidence that the step up in investments would yield excellent long-term returns. “This isn’t some sort of quixotic top-line grab, you know. We have confidence that these investments will yield strong returns on invested capital,” CFO Brian Olsavsky told investors. But they weren’t buying it. The stock fell.

Just a couple of months later, though, the decision to pull forward capital expenditures looks like a genius move. Here’s why and what it means for Amazon stock.

The massive compute crunch at a leading AI lab

The biggest evidence of growing demand for compute can be seen at leading artificial intelligence (AI) lab Anthropic, which has worked closely with Amazon for years. Amazon initially invested in the company in 2023.

Anthropic is seemingly seeing extraordinary compute demand from its users as it rolls out new features, such as Claude Cowork, and as third-party agents like OpenClaw, increase usage. That’s exemplified in some significant pricing changes going on at Anthropic. It has restricted OpenClaw, requiring users to pay more if they want to continue running it. Additionally, it changed enterprise billing to focus on usage instead of selling based on the number of users.

When Claude announced Mythos, it said it was too dangerous to release to the public. Instead, it’s offering limited access to a handful of select enterprises, which will use it to secure their code bases before a broader release. But Anthropic’s limited compute capacity may also be a reason to limit Mythos’ release, which can be very compute-intensive.

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All this points to a massive need for additional compute capacity for Anthropic. And a recent deal with Amazon indicates just as much. Amazon added $5 billion to its investment in the AI lab, with plans to add up to $20 billion more. In exchange, it received commitments from Anthropic to spend $100 billion on AWS services. The move will add to AWS’s existing backlog of $244 billion in remaining performance obligations as of the end of 2025.

Other leading AI labs are also making big long-term commitments. Amazon secured an additional $100 billion commitment from OpenAI in February. In his letter to shareholders earlier this month, CEO Andy Jassy wrote, “Of the AWS capex we expect to spend in 2026, much of which will be monetized in 2027-2028, we already have customer commitments for a substantial portion of it.”

The impact on Amazon

With the increased spending on Amazon Web Services, there are two notable impacts on the company’s financials.

First, Amazon should see continued acceleration in AWS revenue over the coming years. As mentioned, the step up in spending won’t actually impact revenue until 2027 and 2028. It takes a long time to build new data centers and stand up servers.

But management continues to note that it’s monetizing capacity as quickly as it’s installed. Jassy shared that AWS’s AI revenue, specifically, hit a $15 billion run rate earlier this year, and it’s growing extremely quickly.

The acceleration in capex necessarily has to front-run the acceleration in AWS revenue. But that means a significant drag on free cash flow as Amazon pursues the massive opportunity ahead of it, as indicated by Anthropic’s recent moves. In fact, the massive jump in spending this year could result in negative free cash flow for the business in 2026.

Over the long run, however, Amazon should generate even more free cash flow than it did before the start of the AI investment cycle. For reference, Amazon’s trailing-12-month free cash flow peaked at $53 billion in mid-2024.

Investors should look for continued acceleration in AWS revenue as an indication that increased capital spending is paying off. (Amazon also increased capex by more than 50% in 2025.) Additionally, a backlog that’s growing faster than revenue, can support the business’s long-term growth.

While investors have since bid the stock price back up from its sell-off earlier in the year, shares only trade modestly above where they were at the end of January. Amazon stock is still fairly attractive at the current price, given the long-term opportunity to accelerate AWS and produce massive amounts of free cash flow by the end of the decade.