Amazon (NASDAQ:AMZN) shares climbed as much as 10% in extended trading Thursday after the company reported its strongest AWS growth in over four years, signaling that its heavy artificial-intelligence investments are beginning to pay off. The cloud division's sales jumped 37% to $42.2 billion, accelerating from 28% in the prior quarter and beating Wall Street's expectation of roughly 31%.
Cloud operating income surged 64% to $16.6 billion, lifting the division's operating margin to 39.4%. That performance helped Amazon's total revenue rise 20% to $200.6 billion, surpassing the consensus estimate near $197 billion. Operating income climbed 43% to $27.5 billion, while diluted earnings came in at $5.75 per share—though that figure includes $53.4 billion in non-operating pre-tax income, primarily tied to gains from its Anthropic investment.
AWS clears a high bar
AWS now accounts for roughly 61% of Amazon's operating profit despite representing only about 21% of total sales. Its annualized revenue run rate reached $169 billion, strengthening its competitive position against Microsoft Azure and Google Cloud. Evercore ISI analyst Mark Mahaney noted in a client report that the quarter delivered a decisive top-line beat and the strongest consolidated and AWS margin print in several quarters.
The result was particularly notable because Amazon achieved faster AWS growth without sacrificing profitability. Sales acceleration came alongside margin expansion, easing concerns that the company was spending heavily merely to defend market share in cloud computing.
$220 billion AI bill gets a pass
CEO Andy Jassy raised Amazon's 2026 capital-expenditure plan from about $200 billion to $220 billion, citing robust demand and rising memory-chip costs. He said Amazon would still lack sufficient capacity to meet demand in 2026 and that the constraint could persist through 2027. Much of AWS's 2027 capacity is already reserved, with commitments extending into 2028.
Amazon also revealed that its AWS AI operation and custom-chip business each exceeded annualized revenue run rates of $25 billion, growing at triple-digit percentages. The market appears to view the spending as demand-backed rather than speculative, but the budget extends beyond AWS—it also funds semiconductors, robotics, satellites, and other technology infrastructure.
Free cash flow and guidance temper the celebration
Despite the strong cloud performance, Amazon's trailing free cash flow swung to a $7.6 billion outflow, down from an $18.2 billion inflow a year earlier. Trailing operating cash flow rose 33% to $161.4 billion, but property and equipment purchases increased sharply, outpacing cash generation. Zacks Investment Research strategist Ethan Feller told MarketWatch that the move into negative free cash flow warrants monitoring, even though it reflects management's deliberate investment strategy.
Third-quarter sales guidance of $197 billion to $202 billion also fell short of the FactSet consensus of roughly $203.9 billion. The market's patience with the elevated spending will likely hinge on whether AWS can sustain its growth trajectory and eventually convert investments into cash returns.
Investors have shown they will tolerate capital expenditures above $200 billion as long as AWS grows near 37% and maintains margins around 40%. That bargain becomes harder to defend if cloud growth decelerates toward 30% before capital intensity declines. For now, the market is rewarding exceptional cloud performance, but the warning signs of rising cash burn and softer guidance could test that optimism.
This article is for informational purposes only and does not constitute financial advice.
