Amazon Web Services Backlog Reaches $496 Billion: Does That Make Amazon Stock a No Brainer Buy?

SUMMARY

Parkev Tatevosian, CFA, analyzes Amazon's latest financial results, highlighting the explosive growth of its AWS segment and the implications of soaring capital expenditures. The discussion weighs the company's record profitability and future cash flow projections against investor concerns about heavy spending and customer concentration.

MAIN POINTS

• Amazon's AWS segment reported $42.2 billion in revenue and a $496 billion backlog, while capital expenditure guidance increased to $220 billion. [0:00]
• AWS continues to deliver operating profit margins above 30%, contributing to Amazon's record overall operating margin of 12.68%. [1:00]
• Amazon's returns on invested capital have reached 22%, with recent capital spending increasingly directed toward the higher-margin AWS business. [3:03]
• Amazon's valuation is near historical averages, but investor sentiment has cooled due to large AI-related investments and negative near-term cash flow projections. [4:02]
• A fair value estimate of $314 per share suggests 21% upside, but risks include high capital expenditures and customer concentration in AWS. [6:02]
• Amazon retains a top 10 stock ranking in the analyst's portfolio, with continued focus on AI investments and upcoming coverage of Nvidia's earnings. [7:01]

DETAILED ANALYSIS

Amazon's latest quarterly update revealed that its Amazon Web Services (AWS) segment continues to be a major growth driver, generating $42.2 billion in revenue, an increase of 37% year-over-year. The AWS backlog reached an unprecedented $496 billion, reflecting robust demand for cloud computing services. This growth in AWS has contributed to Amazon's overall revenue rising to $775 billion, up nearly fivefold over the past decade.

Operating profit margins have also improved significantly, reaching a record 12.68% in the most recent twelve-month period, compared to just 3% in 2017. These gains are attributed to increasing efficiencies as Amazon's network densifies, lowering the marginal cost of serving additional customers.

Amazon's capital allocation strategy has shifted notably in recent years. While earlier investments focused on building out the e-commerce fulfillment and logistics network, recent capital expenditures are increasingly directed toward AWS, which boasts operating profit margins above 35%. This reallocation is expected to enhance Amazon's returns on invested capital, which have climbed to 22%, up from 7% in 2017.

However, the company has raised its capital expenditure guidance for 2026 to $220 billion, making it the highest-spending company globally in this area. This aggressive investment, particularly in artificial intelligence infrastructure, is expected to result in negative free cash flow of $34 billion in 2026 and $6 billion in 2027, with a return to positive cash flow projected for 2028 and beyond.

Despite these heavy investments, Amazon's forward price-to-earnings ratio stands at 24.9, close to its historical average. The market has responded cautiously, with some investors concerned about the scale of spending and the concentration of AWS revenue among major customers like OpenAI and Anthropic. Nevertheless, a fair value estimate of $314 per share indicates potential upside of 21% over the next 12 to 18 months.

The balance of accelerating AWS growth, record profitability, and strategic risks from capital allocation and customer concentration shapes the current investment outlook for Amazon.

LINKS

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