AWS is accelerating fast
Amazon's cloud computing unit, Amazon Web Services (AWS), raked in $42.2 billion in revenue for the second quarter, marking a 37% rise compared to the same period in the previous year. This steady acceleration in growth has now happened for four consecutive quarters, highlighting how powerful the momentum is. AWS has been pushing forward with a growing set of artificial intelligence (AI) tools, and these are now the main reason for the rapid growth in revenue. As companies and developers turn to AI-driven solutions, AWS is positioning itself as a central player in the space.
One of the key strengths of AWS lies in its ability to provide customized AI hardware solutions. Amazon has developed its own AI chips, including Trainium2 and Trainium3, both of which outperform the competition in terms of price-performance by up to 30% and 40%, respectively. These chips are specifically designed to handle AI workloads efficiently. On the software side, AWS has also made strides. Kiro, its AI coding assistant, is now 50% more cost-effective than similar tools in the market. Usage of Kiro tripled in the second quarter, showing how valuable the tool has become to developers looking to streamline their code and reduce costs.
Beyond the product offerings, AWS has an impressive amount of demand waiting to be fulfilled. The platform currently has a $496 billion order backlog, which represents customers eager to expand their usage as new data center capacity becomes available. This backlog is growing at a triple-digit percentage rate compared to the previous year, and it shows no signs of slowing down. The growing backlog suggests that the company is on track to convert a significant amount of unfulfilled demand into actual revenue in the coming quarters.
Chief Executive Officer Andy Jassy has taken note of this growing potential. While in the past he had predicted that AWS could eventually generate a few hundred billion dollars in annual revenue, he now believes the cloud division could reach $1 trillion per year in the future. This revised projection underscores the vast untapped potential and the increasing confidence among investors and company leaders in the long-term prospects of the cloud business.
Capital spending and future returns
To keep up with the high demand and expand its data center capabilities, Amazon plans to invest a massive $220 billion in 2026 alone. This spending is part of a broader strategy to build more data centers, which will be critical in converting the $496 billion backlog into revenue. However, the company can't immediately deduct these costs from its earnings. Because data centers typically have a long useful life, Amazon will depreciate the capital expenditures over several years, spreading the impact across future financial reports.
The depreciation approach means that the financial impact of this year's spending will be felt in the coming years, especially in 2027, 2028, and beyond. While this could temporarily affect earnings, Jassy and the executive team are banking on the fact that the revenue from AWS will grow rapidly enough to justify the massive capital investment. If AWS continues to deliver strong revenue gains, the company should see a return on this spending in the form of increased profits and shareholder value.
Amazon's valuation and profit picture
Looking at Amazon's valuation, the stock has a price-to-earnings (P/E) ratio of approximately 22 based on the earnings from the last four quarters. This is significantly lower than the P/E ratio of the Nasdaq-100, which stands at 32.7, suggesting that Amazon could be undervalued when compared to its major tech peers. The lower P/E ratio might make the stock appear more attractive to investors who are focused on value.
However, there is a caveat to consider. In the first half of 2026, around $69 billion of Amazon's $120.7 billion in pretax profit came from paper gains on its investment in Anthropic, a company that is not directly related to Amazon's core operations. These gains are more speculative and not tied to the company's day-to-day business. Analysts on Wall Street are anticipating a slowdown in the growth of Anthropic's value, which could lead to a decline in Amazon's overall earnings in 2027. Taking this into account, Amazon's forward P/E ratio is expected to rise to 27.7. While this is still considered reasonable by many investors, it does make the stock appear more expensive when viewed through the lens of future earnings projections.