$AMZN (+4.71%)
AWS’s growth accelerates to 39%, but the market is punishing the massive AI capital expenditures and the slump in free cash flow
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The bottom line: The problem isn’t AWS. AWS is growing faster, its backlog is rising, and margins remain strong. The problem is how much Amazon has to invest to deliver this growth. That’s exactly what the entire valuation currently hinges on.
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Average price target: $324
Potential from the current price of $226.09: ~43%
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Current analyst ratings:
• Goldman Sachs: Conviction Buy, $370 (+64%)
• Evercore ISI: Outperform, $355 (unchanged) (+57%)
• UBS: Buy, $348 (unchanged) (+54%)
• KeyBanc: Overweight, $345 (down from $350) (+53%)
• Mizuho: Outperform, $335 (up from $330) (+48%)
• Telsey: Outperform, $335 (unchanged) (+48%)
• Canaccord: Buy, $330 (unchanged) (+46%)
• Susquehanna: Positive, $325 (unchanged) (+44%)
• BofA: Buy, $317 (down from $320) (+40%)
• Wedbush: Outperform, $300 (unchanged) (+33%)
• Citizens: Market Outperform, $275 (down from $315) (+22%)
• Raymond James: Outperform, $250 (down from $300) (+11%)
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What was really strong:
• AWS revenue of approximately $46 billion, +39% YoY
• Sixth consecutive quarter of accelerated AWS growth
• Fastest AWS growth in nearly five years
• Management expects AWS growth of more than 40% in both 2027 and 2028
• AWS backlog rose to approximately $578 billion
• AWS operating margin remained exceptionally high at approximately 39%
• Company-wide operating margin reached a record 13.9%
• GAAP net income of approximately $28.1 billion exceeded expectations
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The real AI story: Demand exceeds available AWS capacity. Bedrock token usage increased approximately 17-fold year-over-year, custom silicon is growing at triple-digit rates, and AgentCore deployments have doubled compared to the previous three quarters. Inference now accounts for more than half of AWS’s AI revenue.
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Why the stock is still falling:
• Q3 revenue of $201.9 billion was slightly below the Street consensus of around $202.3 billion
• EPS of $1.89 was below the expected $1.96
• Free cash flow for the last twelve months fell to minus $42.4 billion, down from plus $14.8 billion a year ago
• Q3 free cash flow was approximately minus $33.5 billion, significantly worse than expected
• Capex for 2026 remains at approximately $220 billion
• Amazon announces significantly higher investments again for 2027
• Q4 operating income guidance of $28.5–33.5 billion is at the midpoint, below expectations
• Advertising was also weaker than hoped
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The key point: AWS did not disappoint. 39% growth would be strong enough on its own. The market is instead wondering whether Amazon must deploy more and more capital for every additional percentage point of growth—and when this will once again generate real free cash flow.
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The bull case: A large portion of the new AI capacity is already locked in through multi-year contracts. Amazon also cites improved payback periods for compute investments. If AWS does indeed grow by over 40% in 2027 and 2028, today’s capex could look very rational in hindsight.
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The Risk: Amazon is investing enormous sums today, while the financial return will only become apparent later. If AWS does not sustain growth above 40% or if margins decline due to depreciation, free cash flow will remain under pressure for longer.
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Conclusion: AWS isn’t the problem—it’s the cost of that growth. Amazon is seeing very strong AI demand and high cloud profitability, but is currently burning through massive amounts of cash as a result. The next move for the stock therefore depends less on even higher AWS growth than on proof that the record-breaking Capex will once again translate into record-breaking cash flow.
