Friends,
Last week, we learned a lot about the state of artificial intelligence (AI) in the business community. The shortened version: it's a bonanza.
The longer version:
- Last Wednesday, Meta announced that it would be spending over $100 billion on AI investments in 2026.
- One day later, Amazon followed up by forecasting capital expenditures of around $120 billion this year alone.
Here's the funny thing about Amazon's announcement. The company reported operating profits of over $19 billion (its second-largest quarterly profit ever). At the same time, the company's free cash flow plummeted -- coming in 98% lower than the profit mentioned above.
How is that possible?
It has to do with wonky accounting. Amazon spent $32 billion on capital expenditures -- mainly on servers, AI chips, and data centers for AWS -- last quarter. But accounting rules allow those expenses to be spread out over several years -- even though the cash left Amazon's account this spring.
That's why there's such a big difference between operating profits (orange) and free cash flow (blue). And as you can see, this is actually nothing new for Amazon.
Mind you: none of this means something nefarious is going on at Amazon. Nor does it mean these investments are a waste of money.
What it does mean is that Amazon (and Meta, and Google, and Microsoft) are making huge bets on the potential of AI. So long as that turns out to be the truth, these companies should massively prosper. If it somehow doesn't -- then those chickens will eventually come home to roost.
One thing is certain: these companies are currently willing to take the long view, trading pain in the short-term for the potential of massive gains over the coming decades. It mirrors the mental model we adopt here at Long Term Mindset. In that respect, we're excited to see how it all plays out.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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