Morgan Stanley: Amazon AWS growth misses expectations; Morgan Stanley cuts price target but remains optimistic on expansion

Why did AWS growth miss expectations, and why is the long-term outlook unchanged?

AWS revenue rose 39% year over year in the third quarter of 2026, below Morgan Stanley’s prior forecast of 42%. Revenue nevertheless increased by about 3.8 billion dollars from the previous quarter, AWS’s second-largest quarterly increase ever.
Based on the upper end of Amazon’s fourth-quarter company-wide revenue guidance, Morgan Stanley estimates that AWS revenue could grow year over year in the low- to mid-40% range. Management expects AWS growth to exceed 40% in both 2027 and 2028.
AWS backlog reached 578 billion dollars, up 82 billion dollars from the previous quarter and well above the bank’s expected increase of 17 billion dollars, indicating that multiyear demand is accumulating. Amazon also plans to sell Trainium chips to third-party data centers in 2027, which Morgan Stanley believes could add a source of earnings growth.

Amazon’s third-quarter cash capital expenditure was about 75.9 billion dollars, above Morgan Stanley’s forecast of 59.4 billion dollars. The bank believes higher spending signifies chip and rack deliveries and data center openings, helping new capacity generate revenue once fully utilized.
Expansion also consumes substantial cash: Morgan Stanley expects capital expenditure of about 350.2 billion and 360.4 billion dollars in 2027 and 2028, respectively, and free cash flow of negative 81.4 billion and negative 15 billion dollars. Its model also includes debt financing of 70 billion and 25 billion dollars in those respective years.
The bank expects the AWS operating margin to rise from 38% in 2026 to 41% in 2028. In its model, depreciation and amortization as a share of AWS revenue rise from 20% to 30% over the same period, while other operating expenses fall from 41% to 29%; the latter is key to the margin improvement.

Amazon is reducing its cost to serve by optimizing inventory placement, shortening delivery distances and consolidating packages. Despite approximately 880 million dollars of shipping cost pressure from fuel inflation and higher line-haul rates, third-quarter delivery expenses rose 11% year over year, below the 12% increase in units sold.
Fulfillment and transportation costs per unit fell 3% and 1% year over year, respectively. However, the start of capitalization for the Leo satellite business has been delayed from the fourth quarter of 2026 to the first quarter of 2027, and related costs will continue to affect North American retail margins. Morgan Stanley estimates this adds approximately 200 million dollars of sequential pressure to fourth-quarter North American operating profit.
Shopping assistant usage is also growing: more than 400 million customers used Alexa for Shopping over the past year, up 60% year over year. US users spent an average of 50% more than nonusers, but the spending difference between the two groups does not itself establish causation.

The bank cut its AWS revenue forecasts for both 2027 and 2028 by about 3%, implying growth rates of 44% and 42%, respectively. It lowered its 2028 earnings per share forecast by about 5% to 15.76 dollars.
Morgan Stanley maintained its Overweight rating and top-pick designation, while cutting its price target from 350 dollars to 335 dollars. The target is approximately 21 times its 2028 earnings per share forecast.