Cloud Cover: AWS Powers Amazon's Margins, 2031 Bond Yields 4.85%

• AWS led growth: Q1FY2026 sales up 16.6% YoY to US$181.5 billion; AWS grew 28.4% YoY, lifting operating margin to 13.14% (from 11.16%). 
• FCF under pressure: AI capex is outrunning operating cash flow - TTM FCF fell to just US$1.2 billion due to increase in AI capex (from US$25.9 billion). 
• Rising leverage:  Debt/EBITDA up to 1.46x (from 1.14x) and net debt/equity to 18.96% (from 16.65%), even as interest coverage improved to 33.72x.  
• 2031 bonds fairly priced:  t 4.96% YTW (~50bps over Treasuries), it offers a real pickup over lower-rated retail peers (TGT, KR) but trades in line with higher-rated tech peers (GOOGL, MSFT).  

Company Profile

Amazon.com Inc. (NASDAQ: AMZN) runs three reportable segments: North America, International, and Amazon Web Services (AWS). North America and International cover Amazon's retail marketplace, advertising, and subscription businesses (Prime and other memberships), earning revenue through store sales, seller commissions, advertising placements, and subscription fees. AWS, Amazon's cloud infrastructure and AI services arm, earns revenue on a consumption basis - customers pay for compute, storage, and other cloud services as they use them. Once AWS has deployed its data centres and infrastructure, it can serve additional customer demand at relatively low incremental cost. As utilisation rises, incremental revenue tends to outpace incremental operating costs, supporting operating leverage.

Recent Financials: Three Segments, One Story of Acceleration

Amazon's FY2025 (ended 31 December 2025) results showed broad-based growth across its three segments, with consolidated net sales up 12.4% YoY, to US$716.9 billion. North America remains the largest segment, contributing 59.5% of total net sales at US$426.3 billion, up 10.0% YoY. International grew faster, up 13.3% YoY to US$161.9 billion (22.6% of total net sales). While AWS is the smallest segment at 18.0% of total net sales, it is the group’s profit engine and fastest-growing segment (+19.7% YoY to US$128.7 billion).

That momentum carried into Q1FY2026, where consolidated net sales grew 16.6% YoY, to US$181.5 billion. All three segments accelerated (see Figure 1): North America added 12.1% YoY to US$104.1 billion (57.4% of total), International grew 18.7% YoY to US$39.8 billion (21.9% of total), and AWS surged 28.4% YoY to US$37.6 billion (20.7% of total). AWS is growing roughly 1.5x the group’s overall growth rate, off a base that is only a fifth of total net sales.

Management has guided for Q2FY2026 net sales of US$194.0 billion to US$199.0 billion, representing 16% to 19% YoY growth – a range that may include some seasonal benefits from Prime Day.

Figure 1: Amazon Net Sales Mix by Segments (FY2025 and FY2026)

Margins Widening as the Mix Shifts

As seen in Figure 2, operating income has followed a trough-to-recovery arc since FY2022, when margin nearly halved to 2.38% as Amazon over-built its delivery network and absorbed higher operating costs. More importantly, operating income has recovered since, growing to US$80.0 billion, with margin climbing to 11.16% in FY2025. 1Q2026 operating income similarly grew +29.6% to US$23.9 billion, with margins jumping to 13.14%. That improvement came from growth in sales of products and services alongside continued efficiency in managing operating costs. With AWS now the fastest-growing segment and structurally the highest-margin of the three, this margin widening looks less like a one-off cost-cutting exercise and more like the natural consequence of its business mix. Put simply, as AWS's share of consolidated revenue rises from roughly 18.0% in FY2025 toward the 20.7% already seen in Q1FY2026, the blended margin should keep climbing even if North America and International margins hold flat (assuming AWS margins also remain stable). The change in revenue mix alone supports further margin expansion without requiring additional cost-cutting. If sustained, this should steadily improve earnings-based coverage, even before any credit-specific deleveraging.

Management has also guided operating income to a range of US$20.0 billion to US$24.0 billion, above the US$19.2 billion posted in Q2 FY2025 – growth of just 4.2% at the low end but 25.0% at the high end. However, the guided range is wide enough (roughly 10.1% to 12.4% margin) that the outcome could land anywhere from a modest margin dip to further expansion.

Figure 2: Operating income and Operating Margin (FY2021 – FY2025)

AI Capex Race & Cash Flows

To fund its longer-term strategic priorities - enhancing the customer experience and expanding its AI infrastructure - Amazon has stepped up its capital expenditure sharply. Projected capex for FY2026 is approximately US$200 billion, roughly up 50% from FY2025's actual capex of US$131.8 billion. The bulk is earmarked for AWS data centres and custom AI chips, with the remainder split between the Amazon Leo satellite buildout and the fulfilment network.

This level of spend reflects an industry-wide dynamic. Because compute capacity is currently the binding constraint on cloud revenue growth, every hyperscaler is running this build-out simultaneously. Together with the three other large US hyperscalers (Microsoft, Alphabet, and Meta), combined 2026 capex is expected to range between US$690 billion and US$720 billion.
For Amazon, most of its own outlay isn't speculative. It is directly tied to AWS's backlog of contracted commitments not yet recognised in revenue - approximately US$364 billion as of Q1FY2025. These are contracts with original terms exceeding one year, with a weighted-average remaining life of 5.5 years. In practice, this represents customer demand Amazon has already contracted. It is building capacity to serve that demand, not spending ahead of it on the hope that it materialises. The timing of revenue recognition depends on customer usage and Amazon's delivery against the contract, which can run longer than the stated term.

Due to the elevated capex tied to its AI investments, Amazon’s free cash flow has taken a hit. While FCF remains positive on a trailing-twelve-month basis at US$1.2 billion as of end-Q1FY2026, that's down sharply from US$25.9 billion a year earlier (see Table 1). The underlying quarterly run-rate has already turned negative: Q1FY2026 alone generated roughly negative US$17.2 billion in free cash flow, as purchases of property and equipment (US$43.2 billion for the quarter) outran operating cash flow (US$26.0 billion).

As shown in Figure 3, Amazon's cash flow is seasonally weighted toward Q4, which should offer some relief later in the year.  The structural driver, however - capex growing faster than operating cash flow - is the key risk to watch through the rest of this cycle. Amazon continues to generate strong operating cash flows through the year. Still, the aggressive capex plans (US$200 billion) coupled with other potential acquisitions (e.g. previous large investments into OpenAI) result in a clear weakening of Amazon’s cash flow profile.

Table 1: Free Cash Flow

Figure 3: Quarterly Free Cash Flow (Q2FY2024 – Q1FY2026)

Growing Debt Commitments May Pressure Balance Sheet

Following the bond sales Amazon completed across the US and European markets earlier this year (a combined raise of roughly US$54 billion), Amazon’s total debt (including lease liabilities) rose to US$226.9 billion, from US$145.5 billion a year earlier. Total assets grew alongside it, up 42.5% YoY to US$916.6 billion. As a result, total debt-to-total assets expanded from 22.62% to 24.75% (see Table 2).

Net debt-to-equity (including lease liabilities) tells a similar story. Even with cash up 51.3% YoY to US$143.1 billion and total stockholders’ equity up 44.5% YoY to US$441.9 billion, net debt grew faster than either, pushing net debt-to-equity from 16.65% to 18.96%.

Nonetheless, following its latest bond offerings in July, Amazon has reportedly told underwriters that it did not have further issuance plans for the rest of 2026. While this was not formal company guidance, we see this news as a possibly stabilising factor for Amazon’s credit profile in 2026.

Reported debt may understate Amazon’s future fixed obligations. Apart from debt and lease liabilities mentioned above, Amazon had various commitments from 2026 – 2030 (and thereafter), including US$106.3 billion of leases not yet commenced and US$103.8 billion in unconditional purchase obligations. Total contractual commitments as of end-March 2026 were US$569.3 billion, though this also includes future interest payments. Other potential commitments outside the US$569.3 billion figure include a financing arrangement with Anthropic (up to US$20.0 billion).

Overall, Amazon’s balance sheet remains strong, observed through its conservative debt ratios. While Amazon retains substantial financial flexibility, sustained negative free cash flow or further taking on of debt (or other commitments) could pressure its historically large rating headroom.

Table 2: Balance Sheet and Leverage Metrics

Total debt-to-EBITDA rose to 1.46x on a trailing-twelve-month basis, up from 1.14x a year earlier (see Table 3) - a meaningful increase, though still comfortable. Its interest coverage ratio (ICR) moved the other way, improving from 30.62x to 33.72x, even as interest expense climbed every quarter, because operating income grew faster than the interest bill.

While both ratios look reassuring taken at face value, they're earnings-based, not cash-based - and that distinction matters given the FCF trend. The cash actually available to service Amazon’s debt is under more pressure than these ratios show, since capex is consuming cash faster than operating cash flow can replace it. So, while 1.46x and 33.72x aren't credit-risk levels for Amazon today, they're worth watching closely from here.

Table 3: Total Debt/EBITDA and ICR

Bond Recommendation

As shown in Table 4 below, the AMZN 4.800% 09Jul2031 Corp (USD) offers a yield-to-worst of 4.96% at an ask price of 99.29 (+50bps over the 5-year US Treasury) - trading almost exactly at par. At roughly 5 years to maturity, this sits in a sweet spot for income investors, offering a maturity profile that is long enough to lock in a meaningful yield while keeping duration risk relatively manageable. The bond carries a strong investment-grade rating of A1 (Moody's), AA (S&P), and AA- (Fitch), placing it firmly in the upper tier of corporate credit. That reflects Amazon's scale and diversified cash flows - even as the company works through a debt-funded capex cycle that has pushed leverage higher, as detailed earlier in this report.

Amazon's retail-facing business puts it in the same conversation as Kroger and Target. At a similar ~5-year tenor, Target's 7.000% notes due July 2031 yield 4.83% at A2/A/A- (one to two notches below Amazon) while Kroger's 7.500% notes due April 2031 yield 4.90% despite carrying a Baa1/BBB rating (two to three notches below Amazon). In both cases, Amazon's bond offers a higher yield than lower-rated retail peers, which is the contrary to what their relative credit ratings alone would imply. That combination of better credit quality paying a similar or better yield makes the AMZN 2031 bond look attractively priced against its retail comparables.

However, the comparison looks different against Alphabet and Microsoft, the two peers most relevant to Amazon's other identity as AWS. Alphabet's 4.100% notes due February 2031 (Aa2/AA+, one notch above Amazon) yield 4.82%, and Microsoft's 1.350% notes due September 2030 (Aaa/AAA, two to three notches above Amazon) yield 4.56%. Here, Amazon's higher yield appears broadly consistent with its lower credit rating relative to these two - the market is compensating investors appropriately for sitting one to three notches further down the ratings scale.

While Amazon’s 2031 bonds provide some compensation for credit and liquidity risk, the pickup is modest and appears broadly consistent with Amazon’s high-quality investment-grade profile rather than unusually attractive. Given that comparable AA corporate spreads are currently around the mid-50-bp area, the bond screens closer to fairly valued than cheap.

Table 4: Peer Comparison

Issuer	Issue	Ask Price (USD)	Yield to Worst (%)	Years to Maturity	Credit Ratings (Moody’s / S&P / Fitch)
Amazon.com Inc	AMZN 4.800 09Jul2031 Corp (USD)	99.29	4.96	4.95	A1 / AA / AA-
Amazon.com Inc	AMZN 3.600% 13Apr2032 Corp (USD)	93.34	4.95	5.71	A1 / AA / AA-
Amazon.com Inc	AMZN 5.100% 09Jul2033 Corp (USD)	99.26	5.23	6.95	A1 / AA / AA-
Amazon.com Inc	AMZN 5.450% 20Nov2055 Corp (USD)	88.58	6.31	29.32	A1 / AA / AA-
Target Corp	TGT 7.000% 15Jul2031 Corp (USD)	109.49	4.83	4.97	A2 / A / -
Target Corp	TGT 4.500% 15Sep2032 Corp (USD)	98.66	4.75	6.14	A2 / A / -
Target Corp	TGT 4.400% 15Jan2033 Corp (USD)	97.61	4.84	6.47	A2 / A / -
Target Corp	TGT 4.800% 15Jan2053 Corp (USD)	86.29	5.82	26.48	A2 / A / -
Kroger Co	KR 2.200% 01May2030 Corp (USD)	90.81	4.91	3.76	Baa1 / BBB / -
Kroger Co	KR 1.700% 15Jan2031 Corp (USD)	87.29	4.90	4.47	Baa1 / BBB / -
Kroger Co	KR 7.500% 01Apr2031 Corp (USD)	110.73	4.90	4.68	Baa1 / BBB / -
Kroger Co	KR 5.500% 15Sep2054 Corp (USD)	91.45	6.22	28.14	Baa1 / BBB / -
Alphabet Inc	GOOGL 4.100% 15Feb2031 Corp (USD)	97.09	4.82	4.56	Aa2 / AA+ / -
Alphabet Inc	GOOGL 4.375% 15Nov2032 Corp (USD)	96.82	4.97	6.31	Aa2 / AA+ / -
Alphabet Inc	GOOGL 4.400% 15Feb2033 Corp (USD)	96.14	5.10	6.56	Aa2 / AA+ / -
Alphabet Inc	GOOGL 5.450% 15Nov2055   Corp (USD)	90.08	6.19	29.30	Aa2 / AA+ / -
Microsoft Corp	MSFT 1.350% 15Sep2030 Corp (USD)	88.05	4.56	4.14	Aaa / AAA / -
Microsoft Corp	MSFT 4.200% 03Nov2035 Corp (USD)	94.44	4.96	9.27	Aaa / AAA / -
Microsoft Corp	MSFT 4.000% 12Feb2055 Corp (USD)	73.57	5.93	28.55	Aaa / AAA / -
Microsoft Corp	MSFT 4.750% 03Nov2055 Corp (USD)	84.92	5.83	29.27	Aaa / AAA / -
Data as of 27 July 2026 Source: Bloomberg

Amazon's operating performance remains strong and improving. But that shouldn't obscure the balance-sheet side of the picture: the company is more indebted than it was a year ago, and free cash flow has deteriorated sharply as capex continues to outrun operating cash flow. That trend is likely to persist through the rest of this capital cycle. On balance, we'd characterise the bond as fairly priced, reflecting genuine credit strength alongside a real and rising leverage and FCF risk that isn't going away in the near term. For investors specifically looking to gain exposure to Amazon's AI capex.

Disclosure: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in AMZN 5.450% 20Nov2055 Corp (USD), GOOGL 5.500% 13Nov2041 Corp (GBP), GOOGL 4.500% 15May2035 Corp (USD), GOOGL 2.050% 15Aug2050 Corp (USD), and MSFT 2.525% 01Jun2050 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.