Amazon's Cloud Business Just Made a $220 Billion Spending Spree Look Sensible

AWS revenue jumps 37.6% to $42.2B, driving Amazon's stock up 15.18% in a day. Cloud backlog hits $496B, but capex rise to $220B pressures cash flow.

For years, the investment case for Amazon rested on the familiar hum of delivery vans and the steady click of e-commerce orders. After Friday's trading session, the narrative has shifted decisively to the data center floor.

The stock surged 15.18 percent in a single day to close at 235.65 euros, leaving it just 1.01 percent shy of its 52-week high of 238.05 euros set in May. It was the company's strongest one-day gain in years, and it came with a clear message from the market: the billions being poured into artificial intelligence infrastructure are worth it — as long as the cloud keeps delivering.

AWS Acceleration Reshapes the Debate

The catalyst was Amazon Web Services, which posted revenue of 42.2 billion dollars for the second quarter, up 37.6 percent year over year. That marks the fastest growth in 18 quarters and the fifth consecutive quarter of accelerating expansion. The unit's operating margin reached 39.4 percent, and by some calculations AWS contributed roughly 78 percent of the company's total increase in operating profit.

Even more telling for long-term valuation is the backlog. AWS's remaining performance obligations swelled to 496 billion dollars, with 132 billion dollars added in the last quarter alone. CEO Andy Jassy indicated that demand is outstripping available capacity, with supply constraints on cloud infrastructure expected to persist into 2027. What was once a bottleneck has become a competitive moat.

Jassy sees this as merely the opening chapter. He put the long-term revenue potential of the cloud business at up to one trillion dollars annually, noting that roughly 85 percent of global IT spending still occurs in on-premises data centers rather than in the cloud — a migration he expects to unfold over the next one to two decades. As a case study, he cited the PGA Tour, which has abandoned trucking servers to tournament sites in favor of AWS-powered AI broadcast technology.

The Cost of Chasing the AI Crown

None of this comes cheap. Amazon raised its capital expenditure guidance for the year from roughly 200 billion to about 220 billion dollars, a 10 percent increase driven by storage costs and demand that exceeds internal capacity. Jassy said much of the additional capacity is already reserved for 2027, with some commitments extending into 2028.

The financial strain is visible in the cash flow statement. Free cash flow on a trailing twelve-month basis has swung to negative 7.6 billion dollars, a sharp reversal from the positive 18.2 billion dollars recorded in the prior-year period. In a different market environment, that kind of cash burn might spook investors. On Friday, they chose to focus on the quality of the spending rather than its sheer scale.

Amazon's in-house chip efforts are a key part of that calculus. The Graviton and Trainium processor lines are now generating revenue at an annualized run rate exceeding 25 billion dollars each. By developing its own semiconductors, the company aims to reduce the cost of training and running AI models while shielding that 39.4 percent operating margin from the pricing power of external chip and storage suppliers.

A Completed OpenAI Deal and a Growing Portfolio

The quarter also brought closure to a long-anticipated transaction. Amazon finalized its 50 billion dollar investment in OpenAI, structured as 15 billion dollars in the first quarter, 13.7 billion dollars in the second, and a further 21.3 billion dollars after the balance sheet date. The stake amounts to roughly five percent of OpenAI, which is now valued at 852 billion dollars. Separately, as part of a 122 billion dollar funding round, Amazon expanded its AWS relationship with OpenAI by 100 billion dollars over eight years.

The company hasn't abandoned its other AI bet. Amazon continues to hold its position in Anthropic, having deployed 18 billion dollars of a committed 33 billion dollars to date. The quarter's net income of 62.6 billion dollars included a 53.4 billion dollar valuation gain from that Anthropic stake.

The Traditional Business Holds Up Its End

While the cloud grabbed headlines, the legacy operations provided the foundation. North America revenue grew 16 percent to 116.2 billion dollars, while international sales advanced 15 percent to 42.2 billion dollars. Advertising revenue climbed 26 percent to 19.8 billion dollars, fueled by ads on Prime Video and live sports broadcasts including the NBA and NASCAR.

The logistics operation is becoming increasingly automated. Amazon now runs more than one million robots across its network and plans to double its fleet of advanced robotic arms, such as Cardinal and Sparrow, in 2026. During the first half of the year, more than 40 percent of ordered items arrived the same day or overnight.

Analysts Cheer, One Voice Cautions

Wall Street responded enthusiastically. At least 15 brokerages raised their price targets, with BMO moving to 380 dollars and JPMorgan to 365 dollars. The consensus target now sits near 332 dollars, while the average analyst target in euro terms stands at 272.83 euros, implying roughly 15.8 percent upside from Friday's close.

For the third quarter, Amazon guided to revenue between 197 billion and 202 billion dollars, with operating income of 22.5 billion to 26.5 billion dollars — growth of 9 to 12 percent year over year.

Not everyone is unreservedly optimistic. Chris Wood of Jefferies cautioned that the industry-wide AI investment buildout could prove costly for individual hyperscalers, pointing to Alphabet, whose free cash flow turned negative for the first time since its 2004 IPO, and Meta, whose free cash flow fell 91 percent year over year. For Amazon, however, Friday's trading suggested investors are willing to underwrite the spending as long as the cloud growth rates justify the capital requirements.

The stock has now gained 19.64 percent since the start of the year. As August unfolds, the focus is likely to shift from the sheer magnitude of the investment program to how efficiently Amazon converts that capital into high-margin AI services. The first quarter of evidence is in, and the market has rendered its verdict.