Why could AWS exceed market expectations?

  • Amazon will report third-quarter results on 29 October. Bank of America expects total revenue of approximately 202 billion dollars, slightly below the market expectation of 202.2 billion dollars, and operating income of 26.4 billion dollars, above the market expectation of 26.1 billion dollars. The difference mainly reflects the bank’s higher expectations for AWS.
  • Bank of America expects AWS revenue to grow 40% year over year, accelerating by 3 percentage points from the second quarter and exceeding the market expectation of 38%. Its assessment rests on added computing capacity, price increases during the year, the gradual ramp-up of AI lab contracts and rising enterprise inference demand.
  • The bank expects AWS revenue to increase by approximately 4 billion dollars quarter over quarter in the third quarter, above the market expectation of 3.4 billion dollars but below the actual second-quarter increase of 4.6 billion dollars. Bank of America also notes that some investors’ growth expectations may already exceed 42%.

Can margins withstand depreciation from capacity expansion?

  • Bank of America expects AWS’s third-quarter operating margin to remain at 39%, above the market expectation of 34.7%. Its reasoning is that higher computing capacity utilization, pricing, workloads on its in-house Trainium chips and Bedrock growth can offset depreciation of new equipment.
  • AWS raised prices for some EC2 computing capacity reservation services by 20% in July, and by another 15% in early October; the increases covered only some products. Bank of America believes this shows demand for the relevant computing capacity still exceeds supply, but lower prices negotiated by large AI customers will pressure margins.
  • In the second quarter, AWS’s remaining performance obligations rose from 195 billion dollars a year earlier to 496 billion dollars. Bank of America expects enterprise inference demand to drive a further increase in the third quarter, but with quarter-over-quarter growth slowing markedly from the second quarter.

What does expanding computing capacity mean for cash flow?

  • Bank of America expects third-quarter capital expenditure of 60 billion dollars, up 75% year over year and approximately 2.5 billion dollars above market expectations; it expects the full-year figure to reach 221.3 billion dollars, up 73% from 2025. Spending mainly involves AWS infrastructure, fulfillment centers and logistics investments.
  • The cost of higher spending is already reflected in the model: Bank of America expects third-quarter free cash flow of negative 15.9 billion dollars, versus the market expectation of positive 5.7 billion dollars; it expects negative 40.9 billion dollars for the full year, compared with an actual positive 11.2 billion dollars in 2025. The bank therefore focuses on whether AWS growth and margins can support returns on the expansion.

How much will retail and advertising weigh on results?

  • Bank of America’s aggregated credit and debit card data show that US online spending grew 9% year over year in the third quarter, slowing by 4 percentage points from the second quarter; separate Bloomberg Second Measure data show observed Amazon sales grew 5%, slowing by 8 percentage points. The two indicators use different measures from the market expectation of 6% growth in North American retail revenue.
  • Bank of America estimates that the change in Prime Day timing shifted approximately 7 billion to 9 billion dollars of revenue into the second quarter, reducing third-quarter retail revenue growth by approximately 5 percentage points year over year; the bank expects advertising revenue growth to slow from 26% in the second quarter to 15% in the third, then accelerate again in the fourth.
  • Retail costs are also under pressure: the average US on-highway diesel price rose 54% year over year in the third quarter. Bank of America estimates that fuel costs for the company’s own deliveries could rise by approximately 1 billion dollars year over year in the fourth quarter; fuel and logistics surcharges already collected by the company can offset some of that pressure.

What should investors watch in fourth-quarter guidance and agent competition?

  • Bank of America expects the company to guide for fourth-quarter revenue of 239 billion to 246 billion dollars, with a midpoint of 242.5 billion dollars, below the market revenue expectation of approximately 244.6 billion dollars; it expects operating income guidance of 29 billion to 34 billion dollars, encompassing the market expectation of approximately 32.9 billion dollars. Slowing growth in online retail spending since October is another pressure the bank is watching.
  • Bank of America believes Meta’s Muse brings competition in agentic shopping and could affect Amazon’s retail traffic and high-margin advertising revenue if it attracts a large number of users. Amazon’s response, Alexa for Shopping, has added new-product tracking and automatic purchasing features.
  • Bank of America maintains its buy rating and 320 dollar price target. The bank believes that explaining returns on cloud capacity expansion and the impact of agents on retail advertising will be important factors in the stock’s performance after the results are announced.