Amazon’s stock dropped 8% to $204, surprising investors with a capital expenditure (capex) forecast of $200 billion. This is the highest forecast among major tech companies. This substantial capex is focused on AI-driven data centers for Amazon Web Services (AWS), exceeding Alphabet’s $180 billion forecast. In the fourth quarter, AWS revenue grew by 24%, reaching $35.6 billion, despite a decline in cloud margins. Additionally, Amazon’s free cash flow fell from $38 billion to $11 billion due to prior high capex spending. Investors are worried that this high level of spending could lead to negative cash flow this year. CEO Andy Jassy expects better returns on investments from increased data center spending. However, Amazon’s connection to OpenAI poses a risk because competitors like Google’s Gemini are making progress. Nvidia has also scaled back its investment in OpenAI, reflecting this shift. Amazon’s custom chip offerings are anticipated to spur higher demand. Even with the stock dipping below its 200-day moving average, it may find support at $197.85. Wall Street is cautious as Amazon’s stock enters bear market territory, but it is still performing better than Microsoft and Oracle. Analysts project a price target of $275 to $300, highlighting the company’s long-term potential in AI. With Amazon’s stock falling below the 200-day moving average to $204, we need to focus on potential downside. The surprising $200 billion capex plan changes the outlook for free cash flow, which was previously viewed as a strength for 2025. This enormous spending, now the highest in big tech, suggests that cash burn will likely weigh down the stock price further. The 8% drop in one day has caused implied volatility in Amazon options to spike, likely reaching levels not seen since early 2025 market corrections. Buying options, like protective puts, has become more expensive compared to just a week ago, but the increased volatility also means more attractive premiums for options sellers. Given the clear trend shift, bearish strategies may be wise in the coming weeks. Purchasing puts with expiration dates in April or May makes sense, aiming for the previous support level of $197.85. If that level breaks, puts with strike prices near 2024’s support of $177 could become profitable, as a continued sell-off seems likely. For a more cautious approach that benefits from high volatility, selling bear call spreads could work well. By selling a call option at a strike price above the current market, possibly at $220, and buying a higher one for protection, we can earn a premium. This strategy profits if Amazon’s stock stays below that level, betting that the significant capex news will limit any substantial upside for at least the next quarter. This spending spree raises concerns as competitors gain ground. Recent surveys from January 2026 showed that Google’s Gemini API usage grew nearly twice as fast as OpenAI’s, making Amazon’s ties to OpenAI seem riskier. Although this aggressive investment might secure long-term AI leadership, the market is currently punishing the hefty short-term costs.

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