"Thanks for sharing! Andy has provided better reasoning and clarity on the accelerating $220B AI spend as well as anyone. Still makes me a bit anxious. :) Do you think his numbers and projections are quite reasonable or a bit optimistic?"

My opinion doesn't matter. Jassy ran AWS for 16 years. I assume he knows better than just about anyone. No reason for me to doubt him.

Implied annual return on server/networking equipment (~70% of data center expense)

Suppose Amazon buys a server cluster for $100 million.

If payback is 3 years:

Annual operating cash generated is roughly

100/3=$33M

That implies approximately a 33% annual cash return on invested capital before taxes.

If the payback is closer to 2.7 years:

100/2.7= $37M

Annual operating cash return becomes roughly 37%.

Converting to ROIC

ROIC is NOPAT ÷Invested Capital

Strictly speaking, cash payback is not identical to ROIC.

However, they are closely related.

If depreciation roughly matches maintenance capex — a reasonable approximation for server fleets?, the implied operating return is approximately:

Payback Approximate Operating Return
2.5 years ~40%
2.8 years ~36%
3.0 years ~33%

After taxes:

Assuming a 15–20% effective tax rate, ROIC becomes roughly 27–32% after tax. Not too shabby.

But that's not all. Jassy said they (AWS) are making progress on pulling forward break evens and extending the useful life of the equipment which would lead to even higher return numbers.

Jassy: "For servers and networking equipment, on average, it takes a little less than 3 years to break even on that investment. The servers currently have a useful life of at least 5 to 6 years, and most of our AI capacity these days is being contracted for at least five-year terms. That means that we're driving significant free cash flow on the servers and networking equipment in the 2-3 years after we break even. It's also worth noting that AWS has a strong track record of pulling forward break evens on server equipment , where we've already made meaningful progress, and finding ways to extend the useful life of this equipment, without impacting the customer experience."

seekingalpha.com - Amazon com inc amzn q2 earnings call transcript