Zacks strategist Ethan Feller believes that after several months of no significant increase in stock prices, AI hyperscale cloud vendors have seen a resonance of revenue, profit growth, and valuation, which may attract capital inflows again.

Feller identifies Amazon, Alphabet, and Meta as core observation targets, stating that the forward P/E ratio for this sector is currently in the range of a little over ten to twenty times, while sales and profits continue to grow at a compound rate; his judgment is that valuations have not fully reflected profit improvements.

Amazon's Q2 revenue grew 20% year-on-year to $200.6 billion, and operating profit increased 43% to $27.5 billion; AWS revenue grew 37% year-on-year to $42.2 billion, marking the fastest growth rate in 18 quarters, with AWS operating profit rising 64% to $16.6 billion.

AWS operating profit margin rose from 32.9% in the same period last year to 39.4%, with an annualized revenue run rate of approximately $169 billion. Amazon also disclosed that its AI and self-developed chip businesses each have annualized revenues exceeding $25 billion, both maintaining triple-digit growth rates.

Feller believes that the accelerated growth of AWS, margin expansion, and the independent revenue scale of AI and chip businesses provide direct evidence of the returns on capital expenditure for hyperscale cloud vendors; however, Amazon's free cash flow has turned negative due to investments in data centers and AI infrastructure, with ROI verification still primarily coming from the operational level of cloud business.

In market mechanics, the buyers of hyperscale cloud vendors are developers and enterprise customers needing GPUs, model inference, storage, networking, and enterprise-level AI services, while the sellers are companies like Amazon, Alphabet, Microsoft, and Meta that control cloud, models, distribution, and data center assets. If AI revenue and cloud profit margins continue to expand, funds that previously avoided this sector due to massive capital expenditures may shift to pursue profit upgrades; if enterprise AI demand is insufficient to cover depreciation, electricity, and computing expansion costs, cash flow pressure will first suppress valuations.

Source: Public Information