Amazon Shares Surge as 37% AWS Growth Eases AI Spending Concerns Despite Negative Free Cash Flow

Key takeaways:

• AWS revenue rose 37% to $42.2 billion, beating the $40.6 billion market estimate.
• Amazon raised its 2026 capital expenditure forecast from $200 billion to approximately $220 billion.
• Trailing 12-month free cash flow fell to a $7.6 billion outflow, while Q3 guidance came in below expectations at the midpoint.
• Investors focused on accelerating AWS growth and stronger profitability, sending Amazon shares more than 9% higher after hours.

Amazon shares surged after the company reported that its enormous investment in artificial intelligence infrastructure was translating into faster cloud growth and substantially higher operating profit.

Revenue for the second quarter ended June 30 rose 20% year over year to $200.6 billion, exceeding analysts’ average estimate of approximately $197 billion. Operating income climbed 43% to $27.5 billion, lifting Amazon’s operating margin to 13.7% from 11.4% in the same period last year.

The central focus of the report was Amazon Web Services. AWS revenue increased 37% to $42.2 billion, comfortably above a consensus estimate of $40.6 billion and accelerating from growth of 28% in the first quarter. It was the cloud division’s fastest expansion in 18 quarters and brought its annualised revenue run rate to approximately $169 billion.

The stronger-than-expected cloud result helped investors look past Amazon’s higher capital-spending forecast, negative free cash flow and comparatively cautious third-quarter guidance. Shares gained more than 9% in extended trading following the results.

AWS Growth Accelerates as Enterprise AI Demand Rises

AWS operating income reached $16.6 billion, up 64% from $10.2 billion a year earlier. Its operating margin expanded to 39.4% from 32.9%, indicating that the cloud division generated stronger profitability even as Amazon continued investing heavily in data centres, networking equipment and AI chips.

AWS accounted for only around 21% of Amazon’s total quarterly revenue but contributed roughly 61% of consolidated operating income, reinforcing its importance to the group’s earnings.

CEO Andy Jassy described AWS as “booming,” noting that its 36.7% underlying growth rate was the strongest in four and a half years. Amazon said the annualised revenue run rate of its AWS AI business had exceeded $25 billion and was continuing to grow at a triple-digit percentage rate.

The company’s broader chip business also surpassed a $25 billion annual revenue run rate and was growing at a triple-digit pace. That figure covers Amazon’s semiconductor portfolio, including its Trainium AI accelerators and Graviton processors, rather than Trainium alone.

Jassy said Amazon still lacked sufficient computing capacity to meet all the demand it expected during 2026, even after increasing its investment plan. He predicted that capacity would remain constrained in 2027 and described the demand already visible for 2028 as particularly strong.

The results extended the cloud acceleration recently reported by Microsoft and Alphabet, suggesting that corporate demand for AI computing, storage and model deployment is supporting another expansion cycle for the global cloud industry. Investors have been assessing whether that growth can justify the extraordinary sums being committed to AI infrastructure.

Amazon Raises 2026 Capital Expenditure to $220 Billion

Amazon increased its expected 2026 capital expenditure to approximately $220 billion from the $200 billion plan announced earlier in the year.

Most of the spending will support AI and AWS infrastructure, although the total also includes investments in semiconductors, warehouse automation, robotics and Amazon’s satellite network. Jassy said rising memory-chip prices were one of the main reasons for the additional $20 billion.

The scale of the infrastructure programme has placed considerable pressure on cash generation. Amazon’s operating cash flow for the 12 months ended June 30 increased 33% to $161.4 billion, but purchases of property and equipment, net of incentives and asset-sale proceeds, rose 64% to $169.0 billion.

As a result, trailing 12-month free cash flow deteriorated to an outflow of $7.6 billion, compared with an inflow of $18.2 billion a year earlier. Amazon attributed the decline primarily to a $66.1 billion year-over-year increase in property and equipment purchases related largely to AI investment.

Purchases of property and equipment reached $54.2 billion during the second quarter alone, compared with $32.2 billion a year earlier. Quarterly operating cash flow was $45.4 billion, meaning cash infrastructure spending exceeded operating cash generation during the period.

Wall Street has become increasingly sensitive to the effect of AI investment on cash flow. Amazon, Microsoft, Alphabet and Meta are now expected to spend a combined $745 billion on capital projects during 2026, with much of that money directed toward data centres, computing chips, power supplies and networking equipment.

Amazon’s stock reaction differed from the market’s response to Alphabet, whose shares came under pressure after the Google parent raised its spending forecast and reported negative free cash flow. Microsoft, by contrast, received a positive response after reporting accelerating Azure growth without announcing a similarly large increase in planned investment.

For Amazon investors, the 37% AWS growth rate and substantial improvement in cloud profitability appeared to provide more immediate evidence that the additional infrastructure was being converted into revenue.

Third-Quarter Guidance Falls Slightly Below Expectations

Amazon expects third-quarter revenue of between $197 billion and $202 billion, representing year-over-year growth of 9% to 12%. The midpoint of $199.5 billion was below analysts’ average forecast of approximately $203.9 billion.

The company noted that Prime Day was held during the second quarter this year rather than the third. Excluding the timing effect of Prime Day in both periods, Amazon estimated that third-quarter revenue growth would be nearly four percentage points higher. The forecast also assumes an approximately 80-basis-point negative currency impact.

Operating income is projected to range from $22.5 billion to $26.5 billion, compared with $17.4 billion in the third quarter of 2025. The midpoint of $24.5 billion was slightly below the roughly $25.1 billion anticipated by analysts, although the upper end of the range would represent growth of more than 50%.

The guidance did not prevent the stock from rallying. Investors instead appeared to place greater weight on AWS’s accelerating revenue, capacity constraints and expanding profit margin.

Bedrock and Trainium Gain Commercial Momentum

Amazon is attempting to turn its AI infrastructure investment into revenue across multiple layers of the technology stack, from data centres and custom processors to foundation-model platforms and enterprise applications.

Amazon Bedrock, which allows companies to build generative AI applications using models from multiple providers, now offers more than 10 fully managed foundation models. Newly added options include OpenAI’s GPT-5.6, Anthropic’s Claude Opus 5, Google DeepMind’s Gemma 4 and SpaceXAI’s Grok 4.3.

Hundreds of thousands of customers are using Bedrock. Amazon said it added more customers during the latest six-month period than during the platform’s first two years and that customer spending in the second quarter exceeded the total recorded across all previous quarters combined.

The company is also expanding adoption of Trainium, its internally designed alternative to AI accelerators supplied by companies such as Nvidia. Anthropic and OpenAI have made multiyear, multi-gigawatt commitments to use Trainium infrastructure, while companies including Uber, Pinterest and several AI start-ups have also adopted or committed to the chips.

Building its own processors could help Amazon improve performance per dollar, secure access to computing capacity and reduce its dependence on external GPU supply. However, it also requires substantial upfront spending on chip development, manufacturing commitments and supporting data-centre infrastructure.

Amazon additionally released Graviton5 for general availability. The company said the processor provides as much as 25% better computing performance than Graviton4, while Graviton technology is already used by 98% of its 1,000 largest EC2 customers.

Retail Operations and Advertising Maintain Growth

Amazon’s retail businesses also delivered solid second-quarter growth.

North American segment sales increased 16% to $116.2 billion, while operating income rose 21% to $9.1 billion. International sales advanced 15% to $42.2 billion, and the division generated operating income of $1.7 billion, up from $1.5 billion a year earlier.

Online-store revenue rose 15% to $70.4 billion, while revenue from third-party seller services increased 16% to $46.8 billion. Worldwide paid units grew 17%, with third-party merchants accounting for 61% of units sold.

Amazon said Prime customers received more items through same-day or overnight delivery during the first half of 2026 than during any comparable period. The number of products delivered at those speeds increased by more than 40% from a year earlier.

Prime Day was moved into June and therefore contributed to the second-quarter figures. Adobe Analytics estimated that US consumers spent a record $26.4 billion online across retailers during the four-day promotional period, an increase of 9.3% from the previous year. The figure measures total US e-commerce spending during the event rather than Amazon’s own Prime Day revenue.

Advertising remained one of Amazon’s fastest-growing businesses. Advertising-services revenue climbed 26% to $19.8 billion, accelerating from growth of 22% in the first quarter. Subscription-services revenue, including Prime membership fees and digital media subscriptions, increased 12% to $13.7 billion.

Anthropic Investment Gain Inflates Net Income

Amazon reported net income of $62.6 billion, an increase of 245% from $18.2 billion a year earlier. Diluted earnings per share reached $5.75, compared with $1.68 in the second quarter of 2025.

The increase did not come entirely from Amazon’s underlying operations. Quarterly earnings included $53.4 billion in pre-tax non-operating income, primarily related to the rising valuation of the company’s investments in Anthropic.

Because that investment gain is separate from Amazon’s core operating performance, the 43% increase in operating income provides a clearer indication of the improvement in the company’s cloud, retail and advertising businesses.

The quarter nevertheless strengthened Amazon’s argument that its AI spending is beginning to produce commercial returns. AWS growth accelerated sharply, its operating margin approached 40%, and Amazon’s AI and chip operations each surpassed annualised revenue run rates of $25 billion—even as the company warned that computing supply remained insufficient to satisfy customer demand.