Amazon's Pentagon Breakthrough Caps a Quarter of Record Margins and $200 Billion AI Ambitions

Amazon's AWS secures Pentagon's top-secret AI contract, posts $38B quarterly revenue, but free cash flow plunges to $1.2B amid $60B data center spending spree.

Amazon Web Services has secured a landmark deal to bring its artificial intelligence systems onto the Pentagon's most classified networks, a contract that underscores the cloud giant's deepening integration with both national security and the broader AI boom. The agreement, announced late Thursday, grants AWS access to Impact Level 6 and 7 security clearances, enabling the US military to analyze battlefield data and accelerate decision-making. Rivals Nvidia and Microsoft also secured similar arrangements, but the timing of Amazon's win — hot on the heels of a blockbuster earnings report — has amplified its significance.

The Pentagon deal arrives as AWS delivers its fastest revenue growth in over three years. The cloud division generated nearly $38 billion in first-quarter sales, a 28% year-over-year surge that powered the parent company's total revenue to $181.5 billion, up 17%. That top-line strength translated into a historic operating margin of 13.1%, the highest in Amazon's corporate history. AWS alone contributed $14.2 billion in operating profit, representing 59% of the group's total earnings.

Yet the headline net profit of $30.3 billion tells a more complicated story. Nearly $16.8 billion of that figure came from a revaluation of Amazon's stake in the AI startup Anthropic, following a fresh funding round that dramatically boosted the investment's worth. Strip out that one-time gain, and adjusted earnings per share landed at $1.56 — narrowly missing analyst estimates of $1.60. Still, core operating profit, excluding the Anthropic effect, climbed a robust 38% year over year.

The order book offers a glimpse of the revenue pipeline ahead. AWS's backlog hit a record $364 billion, and that figure doesn't yet include two massive recent commitments: OpenAI expanding its AWS usage by $100 billion, and Meta placing bulk orders for Amazon's Graviton5 processors to power its own AI workloads. The company's custom chip business has also emerged as a growth engine, surpassing an annualized revenue run rate of $20 billion. CEO Andy Jassy noted that the next generation of Trainium chips is already nearly fully allocated, with binding commitments totaling $225 billion from customers including OpenAI, Uber, and Anthropic.

The flip side of this expansion is a dramatic cash crunch. Free cash flow collapsed to just $1.2 billion from $25.9 billion a year earlier, as Amazon plowed nearly $60 billion in additional capital expenditures into data centers and chips. The company plans roughly $200 billion in total investments for the full year. Jassy defends the spending spree, arguing that new data centers have a useful life exceeding 30 years and that today's cash burn lays the foundation for tomorrow's profits. Long-term debt has swelled to $119.1 billion as a result.

For the current quarter, management guided for revenue between $194 billion and $199 billion, assuming a Prime Day event falls within the period, and operating profit of up to $24 billion. The forecast topped market expectations, but the stock dipped about 2% in after-hours trading as investors weighed the cash flow deterioration against the growth narrative.

Wall Street analysts have largely shrugged off the liquidity concerns, focusing instead on the accelerated AWS growth and the Pentagon deal. At least 14 firms raised their price targets following the report. Benchmark lifted its target from $275 to $370, TD Cowen set a new target of $350, Canaccord Genuity moved from $300 to $330, and Goldman Sachs settled at $325. The stock closed the regular session at $264.06, well below its April record high, as the market awaits proof that Amazon's massive AI bet can eventually convert its full order books into sustainable free cash flow.