AWS Revenue Soars on AI Demand

Amazon Web Services (AWS) has reported its strongest growth in over three years, fueled by booming demand for artificial intelligence (AI) computing power and significant investments in its infrastructure. While sales and client commitments are rising rapidly, the company's aggressive spending to build out data centers has led to a sharp drop in free cash flow, shifting investor focus from growth to profitability.

Infrastructure Spending Spree

Amazon spent $151 billion on property and equipment in the 12 months ending March 31, 2026, a jump of $57.9 billion from the previous year. This spending is largely for expanding data centers to handle AI workloads. AWS sales climbed to $37.6 billion in the first quarter of 2026, up 28% year-over-year, the fastest rate since mid-2022. The company’s backlog of future AWS contracts grew 93% to $364 billion. CEO Andy Jassy noted that Amazon’s custom AI chips like Trainium have secured over $225 billion in revenue commitments. Amazon plans further capital expenditures of $200 billion for 2026, a 56% increase, with much of it for AI data centers.

Free Cash Flow Plummets

Despite strong AWS revenue and operating income, Amazon's massive capital investments have severely hit its free cash flow. Free cash flow for the trailing twelve months fell to just $1.2 billion as of the first quarter, down from $25.9 billion a year earlier. This near-zero cash flow resulted from a $59.3 billion year-over-year increase in purchases of property and equipment, mainly for AI infrastructure. This spending pattern contrasts with previous years that generated substantial free cash flow, forcing Amazon to increase its long-term debt.

Cloud Competition Intensifies

AWS, the cloud market leader with an estimated 30% share, faces stiff competition. Microsoft Azure's cloud services revenue grew 40% year-over-year in Q1 2026, driven partly by AI, reaching $54.5 billion overall. Azure's traffic share also increased 58% year-over-year. Google Cloud's revenue jumped over 63% to $20 billion, showing rapid acceleration and achieving profitability with margins above 17%. While AWS offers broad services, Azure's quick growth and Google Cloud's market share gains indicate a tougher competitive environment.

Betting on Custom Chips

Amazon is betting on its custom silicon chips to gain an edge and create new revenue. CEO Andy Jassy stated that its custom chips business, including Graviton and Trainium, has an annual revenue run rate over $20 billion, growing triple digits year-over-year. Jassy suggested this business could reach $50 billion annually if standalone. Amazon is also considering selling these custom chips externally, which could challenge Nvidia. Major AI labs like OpenAI have committed over $100 billion for AWS services and chip capacity, supporting the company’s infrastructure investments.

Valuation Concerns

Despite record AWS growth, Amazon's valuation is under scrutiny. Its stock trades at a P/E ratio of about 33-36x, which some analysts see as high compared to rivals. The heavy capital spending, while driving growth, has worried investors about the impact on free cash flow. Past announcements of large capex plans without clear FCF projections have often led to stock drops, like the dip in March 2026 following the $200 billion capex guidance. The significant infrastructure investment, crucial for AI leadership, creates a financial overhang. Also, a large part of Amazon's Q1 net income came from gains on its investment in Anthropic, not core operations.

Outlook Ahead

Analysts generally remain positive, with many rating Amazon a Buy or Outperform, expecting continued AWS growth and future AI monetization. Amazon projects second-quarter 2026 net sales between $194 billion and $199 billion, forecasting 16% to 19% year-over-year growth. However, investors will likely watch how Amazon balances its vast infrastructure spending with generating sustainable free cash flow, especially as Microsoft Azure and Google Cloud gain ground.