Amazon (NASDAQ: AMZN) shares experienced a notable uplift following its robust second-quarter earnings report, primarily driven by CEO Andy Jassy’s ambitious forecast for Amazon Web Services (AWS). Jassy, not typically known for bold predictions, stated that the company’s cloud computing unit could eventually achieve $1 trillion in revenue, a declaration that resonated strongly with investors.
AWS Momentum Accelerates with Strong Margins
The standout performer for Amazon in the second quarter was undeniably AWS, which reported a significant acceleration in its growth trajectory. Revenue for the segment surged 37% year over year, reaching $42.2 billion. This marked an increase from the 28% growth observed in the first quarter and 24% in the fourth quarter, representing AWS’s fastest revenue growth in nearly four and a half years, or 18 quarters.
Further underscoring AWS’s expanding influence, Jassy revealed that its artificial intelligence (AI) and chip businesses now command revenue run rates exceeding $25 billion, with the AI segment experiencing triple-digit growth. The unit’s backlog also saw triple-digit growth, climbing to an impressive $496 billion. Operating income within AWS jumped 63% to $16.6 billion, pushing its operating margin to 39%. This margin has now risen for four consecutive quarters, a trend Jassy attributed to the strategic use of custom chips and ongoing investments in software and optimization, noting that this steady rise was not random.
Strategic Capex and Long-Term Cloud Economics
Jassy also provided a deeper insight into the economics underpinning AWS’s operations and its substantial capital expenditure. He announced an increase in Amazon’s capex budget for the year, from $200 billion to $220 billion, primarily due to rising memory costs. This investment is critical as AWS demand continues to outstrip capacity, a trend Jassy expects to persist through 2027, with demand for 2028 already described as “striking.”
The CEO detailed the long-term profitability of AWS, explaining that the company anticipates breaking even on its server and networking investments within two to three years. Servers typically have useful lives of five to six years, and the company secures five-year leases. Moreover, Amazon’s data centers boast useful lives exceeding 30 years, implying that the economics of the cloud business strengthen considerably over time as initial upfront investments in data centers are amortized.
Broader Amazon Performance and Outlook
Beyond the cloud, Amazon’s e-commerce operations also demonstrated robust performance. North America sales increased by 16% year over year to $116.2 billion, while international sales climbed 15% to $42.2 billion. Advertising continued to be a significant revenue driver, with ad revenue rising 26% to $19.8 billion, fueled by its sponsored ad business.
The company achieved notable operating leverage in its e-commerce segments. North American operating income jumped 21% to $9.1 billion, and the international segment saw operating income rise 15% to $1.7 billion. Overall, Amazon’s revenue for the quarter reached $200.61 billion, a 20% increase year over year, comfortably surpassing the analyst consensus of $196.47 billion compiled by LSEG. Earnings per share (EPS) more than tripled to $2.78, though this figure included a substantial gain from Amazon’s investment in Anthropic, making it not directly comparable to analyst estimates of $1.82.
Looking ahead, Amazon projected third-quarter revenue to fall between $197 billion and $202 billion, representing year-over-year growth of 9% to 12%. This forecast was below the $204.1 billion consensus. Adjusted for the shift in Prime Day, growth would be between 13% and 16%, with currency fluctuations expected to impose an 80-basis-point drag.
Valuation and Investor Confidence
Despite previous criticisms regarding Amazon’s stock performance under his leadership, Jassy’s detailed explanation of AWS’s economics and his $1 trillion revenue vision appears to have significantly bolstered investor confidence. Even after the recent stock price appreciation, Amazon’s valuation remains attractive, trading at a forward price-to-earnings ratio of approximately 31 times 2026 analyst estimates and 27 times 2027 estimates. This valuation is considered historically low for the stock and notably below that of retail peers such as Walmart and Costco.
With its e-commerce business performing well and AWS demonstrating strong, accelerating momentum and improving profitability, the company’s shares present a compelling long-term investment case at current levels, according to analysts. The strategic investments in cloud infrastructure and AI, coupled with a clear path to enhanced profitability, position Amazon for continued growth in the coming years.
