By Deborah Mary Sophia and Kanchana Chakravarty
July 31 (Reuters) - Amazon shares surged 13% premarket on Friday after the tech giant's solid cloud sales growth reinforced investor confidence in its massive AI bets and quashed any concerns about the company trailing its Big Tech rivals in the AI race.
The e-commerce and cloud titan posted its strongest cloud growth in over four years, indicating a fresh wave of demand that justifies its 10% increase in planned capital spending for 2026 to $220 billion.
Amazon's results come as a resounding sign to Wall Street that some of Big Tech's AI investments are already generating measurable returns.
Amazon was on track to add about $300 billion in market value on the back of a 37% jump in second-quarter cloud revenue. Earlier this week, Microsoft surged more than 15% after its cloud unit beat estimates with a 43% revenue jump.
However, there's a growing divide in investors' tolerance for the ever-increasing AI spend, set to exceed $730 billion this year.
"The market is no longer questioning whether AI demand is real. The new dividing line is whether unprecedented spending is producing visible, near-term revenue and margin expansion," said Bill Birmingham, managing director at REX Financial.
"The market penalizes spending when monetization is delayed, indirect or difficult to measure."
Meta and Google-parent Alphabet both slumped 7%, despite strong growth in revenues, after the companies raised their capital spending forecasts while free cash flows cratered.
"Amazon is earning the right to keep spending. Where others are asking investors to trust that the payoff will come, Amazon showed it this quarter," said Thomas Monteiro, senior analyst at Investing.com.
"As long as AWS keeps accelerating and margins hold, the market looks willing to fund the build-out, even with free cash flow in the red."
Amazon's free cash flow swung sharply negative in the second quarter, with the company burning $7.6 billion on a trailing 12-month basis, versus $18.2 billion in positive free cash flow a year earlier.
Still, CEO Andy Jassy reassured investors that Amazon is only pouring money into serving demand that already exists. He said a majority of available Amazon cloud capacity for 2027 and some capacity for 2028 had already been reserved by customers.
Chris Ballard, managing partner at Check Capital, said Amazon's approach to spending was "methodical and responsible."
"This level of capital deployment is all very new, so Amazon showing immediate results is a really good sign."
At least 15 brokerages raised their price targets on the stock following results.
Amazon trades at a price-to-earnings ratio of 24.67, compared with Microsoft's 22.94 and Alphabet's 19.35.
(Reporting by Kanchana Chakravarty in Bengaluru; Additional reporting by Shashwat Chauhan; Editing by Shinjini Ganguli)
