Key Points
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Amazon’s cloud business is benefiting immensely from artificial intelligence.
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However, the hyperscaler is spending significantly to build out its AI infrastructure, including data centers.
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Wall Street is weighing heavy spending and negative free cash flow against the future merits of AI.
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Although investors are extremely worried about an artificial intelligence bubble and when it might pop, it’s also become clear that the market has significantly raised its threshold for evaluating large hyperscaler and AI stocks. As of this writing, the Roundhill Magnificent Seven ETF has declined more than 6% over the past month, despite many earnings reports showing signs that AI is benefiting their businesses.
For instance, on Amazon‘s (NASDAQ: AMZN) third-quarter earnings call, CEO Andy Jassy told analysts that he expects the company’s cloud business, Amazon Web Services (AWS), to grow revenue by more than 40% in both 2027 and 2028, becoming a trillion-dollar business at some point in the next five to 10 years.
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Is this enough for Wall Street to get on board?
AI is leading to strong growth
It’s hard to look at Amazon’s third-quarter earnings and say AI isn’t significantly benefiting the business. AWS experienced 39.3% year-over-year revenue growth, the highest level seen in nearly five years. Revenue also achieved an annualized run rate of $184 billion.
AWS benefits from AI in several ways, including selling compute capacity, renting out its custom chips, and selling access to AI models, tools, and agents.
In the third quarter, AWS accounted for nearly 23% of the company’s total revenue but nearly 64% of its total operating profit, so AWS has by far the best margins of the three business lines.
AWS was Amazon’s traditional cloud business, but it’s clear that AI has become the big driver moving forward.
On the earnings call, Jassy told investors, “Enterprises are still very early in using inference at scale, and yet inference already accounts for well over half of AWS’s AI revenue and is growing, and we have a lot of training revenue as well.”
Furthermore, the AWS backlog is now $578 billion, driven by strong demand for core infrastructure and generative AI services.
Will it be enough?
The day after its earnings report, Amazon stock actually fell.
Investors remain concerned about the high spending required to achieve these growth rates at AWS. Amazon continues to guide for $220 billion in capital expenditures this year. Jassy also told analysts the company expects to spend “meaningfully more in 2027.”
This intense level of spending has resulted in negative free cash flow of $42.4 billion for the company over the past 12 months, which has concerned the market.
Interestingly, Wall Street believes AWS’s growth will materialize. Consensus estimates project at least 40% growth in AWS revenue in 2027 and 2028, according to S&P Global Market Intelligence. On Amazon’s third-quarter earnings call, Jassy also came across as increasingly bullish about AWS’s ability to generate compelling returns.
“We continue to accelerate our capex payback and have even more conviction than we already had that the investment we’re making in AWS will yield a much larger revenue and free cash flow-generating business than we would have imagined a couple of years ago, with strong return on invested capital,” Jassy said, adding that he views AI as “a once-in-a-lifetime opportunity.” “We have a compelling flywheel spinning in AWS.”
One reason the earnings report may not have received the response the company was looking for is that quarterly year-over-year growth expectations had climbed as high as 44% before the quarter, according to analysts at William Blair.
The real issue may simply be the unknown. While AI shows no signs of slowing, safety concerns have mounted, leading investors to wonder what could happen to a major AI company or the AI trade if a major security breach or safety event occurs.
Furthermore, investors also worry that AI might cannibalize existing businesses. For Amazon, there are concerns about how AI agents could impact Amazon’s massive e-commerce and ads business.
The concerns might be overblown, but it’s really difficult to imagine what AI looks like in the future. Meanwhile, companies like Amazon are spending hundreds of billions on AI, making it a make-or-break bet.
That’s why expectations are so high — because of the risks. Surely, if Amazon executes as Jassy says, the stock will benefit. But it’s hard for investors to look that far ahead right now, even if they believe in the company’s ability to capitalize on AI.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
