Amazon Jumps On Solid AWS Growth And Profit, Even As Outlook Disappoints And Free Cash Flow Turns Negative

As Bloomberg notes, "Microsoft’s solid earnings breathed new life into the tech sector Thursday, but Amazon’s report after the bell this evening could deflate the optimism again." To be sure, there’s a lot riding on Amazon results. The longevity of the AI spending boom is in doubt as shareholders punish ambitious capex plans, which has taken away some of the support away from the chipmaker stocks. 

Before Microsoft’s earnings, the Philadelphia Semiconductor Index had fallen 27% this month. It bounced more than 7% Thursday. Chipmaker Sandisk rose 23%, Micron and Microsoft itself both climbed more than 16%. The Seattle-based software giant announced better-than-expected results, emphasized its clear roadmap to AI monetization and refrained from increasing its capex plans. Amazon is going to have to produce something pretty special to keep the party going.  

In terms of expectations, analysts expect Amazon profits to rise 8.8% from a year earlier, based on revenue growth of 17.5%. Free cash flow is expected to come in negative for a second straight quarter. Revenue in the key Amazon Web Services business is expected to grow 31% from a year earlier to $40.6 billion.

While free cash flow for the AI hyperscalers as a group is expected to turn negative, for Amazon, it’s seen fluctuating, dipping below zero before recovering. Amazon was an early starter in the world of cloud computing. That has sometimes looked like a disadvantage. It’s among the cheapest of the big tech stocks, trading at a price to blended forward earnings ratio that’s 1.6 standard deviations below the 10-year average. Nevertheless, as Bloomberg's Sebastian Boyd writes, the tone from analysts has been largely positive. Estimates have been revised slightly higher, and climbed to $1.83 from $1.8 at the end of April. 

With all that in mind, this is what Amazon just reported for the recently concluded Q2:

• EPS of $5.75, beating exp of $1.81 (including a one-time profit on its holdings in Anthropic)

Revenue was stronger across the board (except for another modest miss in the small physical store sales category, and a new miss in subscription services).

• Net sales $200.61 billion, beating estimates of $197.01 billion
• Online stores net sales $70.43 billion, beating estimates of $69.92 billion
• Physical Stores net sales $5.79 billion, missing estimate $5.87 billion
• Third-Party Seller Services net sales $46.78 billion, beating estimates of $46.15 billion
• Subscription Services net sales $13.73 billion, missing estimates of $13.75 billion
• Advertising services net sales $19.81 billion, beating estimates of $19.32 billion

However, the most important revenue item, AWS, smashed smashed the sellside estimate...

• AWS net sales $42.23 billion, beating estimates of $40.57 billion, and rising a whopping 37%, the fastest pace of growth since the fourth quarter of 2021. 

Geographically the results were focused on North America beating again by more than $2 billion, even as international was a modest miss:

• North America net sales $116.18 billion, estimate $113.94 billion
• International net sales $42.20 billion, estimate $42.71 billion

Going down the line: 

• Operating income $27.46 billion, beating estimate $23.61 billion
• Operating margin 13.7%, beating estimate 12%
• North America operating margin +7.9%, beating estimate +7.48%
• International operating margin 4.1%, beating estimate 3.76%
• Fulfillment expense $29.63 billion, below the estimate $29.79 billion
• Seller unit mix 61%, beating estimates of 60.2%

While AWS sales growth was solid, just as impressive was the the margin for the segment also increased from 37.68% to 39.36%, just shy of the highest on record, and again beating the median Wall Street estimate of 33.52%. Elsewhere, North American profit unexpectedly jumped to $9.123 billion, resulting in a profit margin of 7.83%, down from 7.94% a quarter ago, while international margins rose to 4.07% from 3.58%, the highest since Q2 2025.

As a result of the rise in AWS profits, and generally solid sales margins, Amazon's consolidated operating margin posted a notable jump and in Q1 increased 9.7% to 11.7%, just shy of an all time high. 

Looking ahead, the company's guidance was unexpectedly weak: 

• Net sales for Q3 are expected to be between $197 billion and $202 billion; the midpoint of $197.5 billion was a big miss compared to the median estimate of $203.93 billion.
• Operating income for Q3 is expected between $22.0 billion to $26.40 billion, the midpoint also falling below the estimate of $25.07

The projected 10.7% revenue growth was the lowest since March 2025.

And while we wait to get some sense of what happened to AMZNs capex guidance, and whether it was revised higher again, here is a less than flattering view of the company's free cash flow: the company's LTM free cash flow plunged to $7.6 billion negative for the trailing twelve months, vs $18.2 billion for the trailing twelve months ended June 30, 2025.

And so, to fund its impressive AWS growth, where competition is becoming more fierce by the day, AMZN will need to issue stock or issue much more new debt to fund further capex growth. Indicatively, AMZN's debt soared to $129 billion in Q2, doubling from $65.6 billion at the end of 2025.

Amazon reported spending more than $53 billion on capex, including proceeds from some sales, in the period ended June 30. The company has said it expects to spend $200 billion — a 56% increase from 2025 — mostly on data centers, including those customized for AI services, prompting investors to focus on any signs of overspending.

After all that, AMZN shares were sharply higher this time - unlike last quarter - up about 8% higher largely on the AWS revenue growth and margin, as the market ignores the negative free cash flow... for now.