Amazon 2Q26 Earnings Update: Tale of Two Halves

Amazon delivered a strong second quarter, beating consensus on revenue and every major segment line, with revenue growing 20% y/y to $200.6 billion — the first time Amazon has cleared the $200 billion mark in a June quarter. Earnings per share saw a significant spike to $5.75 (vs consensus of $1.82), but this figure includes $53.4 billion of non-operating pre-tax "other income", primarily an unrealised mark-to-market gain on Amazon's investment in Anthropic. Excluding this one-off gain, underlying EPS should be around $1.90–$1.95, still above consensus.

AWS drives the quarter

AWS was the primary growth driver during the quarter. Revenue grew 37% y/y to $42.2 billion — an annualised run rate of about $169 billion — marking the fastest growth since 2021 and comfortably ahead of the ~31% market consensus and our forecast of 30%. More importantly, segment operating margin expanded to 39% from 33% a year ago, reaching its highest level in history. AWS backlog, or contracted work that has yet to come online, reached $496 billion during the quarter, up 36% q/q and representing the fastest backlog growth among cloud peers from a quarter ago.

Management pointed to AI demand as the swing factor: AWS's AI business and Amazon's homegrown chips business each crossed a $25 billion annualised run rate, with both growing at triple-digit rates.

Graviton processors are now being used by 98% of the top 1,000 customers, revenue commitments have nearly tripled quarter over quarter, and Graviton 5 is growing at almost twice the rate of Graviton 4, and the AI-optimized Trainium chips have secured multi-year commitments from Anthropic and OpenAI (it is said that Trainium and CPUs offer industry-leading price-performance). The company is now considering selling its custom-designed chips directly to third parties – outside of their cloud services.

Management continues to cite further growth potential, as current capacity remains insufficient to meet all the demand they expect in 2026, while the company already has order books lined up until 2028.

The competitive read-through matters — this came in the same week that Google Cloud posted 82% growth, and Microsoft's Azure grew 43% — but AWS's margin structure remains the differentiator. More importantly, the re-acceleration after several quarters of deceleration is one of the most significant takeaways from the release.

The key takeaway is that Amazon’s AI investment is translating into operating leverage rather than simply higher revenue, supporting AWS's long-term profitability thesis.

Source: Company Announcement, iFAST compilations. Data as of 30 April 2026.

Figure 1: Cloud growth accelerating

Figure 2: Cloud order backlogs

 Other segments delivered as well

The advertising segment grew 26% y/y to $19.8 billion — an acceleration from the low-20s growth rate of recent quarters and a high-margin contributor that increasingly underpins retail-segment profitability.

Online stores grew 15% y/y, beating consensus, supported by this year's Prime Day discount event extending into June. Growth was also helped by record Prime delivery speeds and faster-than-average expansion in Grocery and Everyday Essentials. In the first half of this year, Amazon Pharmacy acquired more than three times as many new customers as in the same period last year, and same-day prescription deliveries grew nearly fivefold.

Interestingly, Amazon delivered strong online store performance depsite the US-Iran war. Despite cost pressures from rising fuel prices due to Middle East conflicts and higher line-haul rates driven by capacity constraints, the company continues to reduce overall service costs. Excluding the impact of fuel and line-haul rate increases, transportation costs grew at a rate slower than our low-single-digit unit growth, consistent with last quarter.

The newly launched Amazon Supply Chain Services, enabling any business to use the same supply chain that powers Amazon to move, store, and deliver everything from raw materials to finished goods, already have several major customers, including Procter & Gamble, 3M, Lands' End, and American Eagle Outfitters.

Alexa shopping experience or AI shopping assistant saw more than 350 million customers using it, and engagement accelerated in Q2, with active users nearly doubling and interactions increasing more than fivefold year-over-year.

CAPEX forecast was up, but the market forgave it

The strong results overshadowed concerns over Amazon's hefty spending. Capital expenditure during the quarter reached $54.2 billion, compared with $32.1 billion a year ago, marking the highest figure recorded since the AI spending frenzy began. Amazon again raised the bar, with capital expenditure projected to hit $220 billion this year, up from previous guidance of $200 billion due to higher memory prices. More importantly, the CEO suggested that this spending spree is unlikely to abate anytime soon.

This has caused the free cash flow crossover. In Q1 2026, TTM capex of $147.3 billion sat just below TTM operating cash flow of $148.5 billion — near-full absorption, which was what we highlighted in the previous quarter. By Q2, TTM capex of $169.0 billion had moved above TTM operating cash flow of $161.4 billion.

Amazon now spends more on building capacity than its operations generate, which is why free cash flow swung to a $7.6 billion outflow. Amazon now joins Alphabet and Oracle as the third hyperscaler to end the quarter with negative FCF. We think additional debt issuance is likely if Amazon  to meet its CAPEX plan.

Amazon has raised about $67 billion of long-term debt in the first half alone, although leverage remains manageable given the company's scale and cash-generating ability. While its overall balance sheet remains healthy — with total assets crossing $1 trillion — debt is growing at such a pace that it warrants extra attention.

*Capex above operating cash flow is sustainable for a stretch given Amazon's debt capacity, but it is not indefinitely sustainable without the AWS revenue curve remaining this steep. The two things to track quarter-to-quarter are whether AWS growth holds near these levels and when free cash flow troughs.

Figure 3: FCF has turned negative

Guidance was moderate

For Q3 2026, Amazon guided for revenue of $197.0–$202.0 billion (+9% to +12% y/y), below expectations of $204.1 billion. Management attributed this to a shift in Prime Day timing, as Prime Day discounts used to take place in July.

 Operating income is guided to $22.5–$26.5 billion, up from $17.4 billion in Q3 2025 — indicating a healthy implied margin trajectory and, at the midpoint, comfortably above the year-ago base.

Reiterate BUY with Lower TP

A high-quality operational beat wrapped in a noisy headline. The stronger AWS performance more than offset investor concerns around higher capital expenditure. However, if the company were to further raise its CAPEX projections, it would need even stronger cloud revenue growth, not to mention the strain on FCF.

We forecast forward earnings for FY26 to grow by 47%, followed by 13% for FY27. Applying our fair P/E of 26x, justified by sustained double-digit earnings growth and strengthening AI monetisation profile, it implies an upside potential of 21%.

As such, we reiterate our BUY call on Amazon, but with a lower TP.

	2025Y	2026E	2027E	2028E
P/E	36.36	22.88	20.21	21.5
Earnings	6.99	10.29	11.65	12
Earnings Growth	24.29%	47%	13%	3%
Sales (bil USD)	717	825	935	1043
Sales Growth	12.40%	15%	13%	11%
Fair PE				26
Target Price	258			312
Upside Potential				21%
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 31 July 2026.