Amazon Earnings: Cloud Demand Improves, but Cash Recovery Is Further Away

Key Morningstar Metrics for Amazon

• Fair Value Estimate
  : $280
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Amazon’s Earnings

Amazon AMZN’s third-quarter revenue rose 12% to $202 billion and operating margin reached 13.9%. Updated guidance was roughly in line with expectations, although the shares fell roughly 7% after hours.

Why it matters: We would characterize Amazon’s earnings as pretty good overall, although the reality of exactly how much cash the artificial intelligence buildout is going to cost is becoming more noticeable.

• Amazon Web Services grew 39%, an acceleration from 37% last quarter, and management expects growth above 40% in both 2027 and 2028. These are solid results. However, everyone remains worried about the cost of this growth.
• Capital expenditures were reiterated at $220 billion for the current year, with 2027 levels now characterized as “meaningfully more” compared with 2026. While the step-up wasn’t unexpected, it was incrementally more explicitly aggressive.

The bottom line: We are lowering our fair value estimate to $280 per share from $300 for wide-moat Amazon as we transfer coverage. We meaningfully raised our revenue and earnings per share forecasts as we re-modeled capex and AWS growth (both higher) and also raised the capital intensity of our long-term forecasts.

• Higher capital intensity is the main driver of the negative valuation revision, as we assume returns on invested capital are range-bound in the midteens. This push and pull between higher capital intensity and higher growth is the key tension between bulls and bears today.
• The shares are now trading at roughly a 20% discount to our fair value estimate, which we believe is skewing the risk/reward ratio more positively. We think these AI investments will pay off, with free cash flow recovering in 2028 and beyond.

Key stats: Other segments generally met our expectations, although advertising growth of 11% was a bit light. Management characterized this as driven by Prime Day and the timing of sporting events and expects a reacceleration to high-teens growth next quarter.