HSBC: Amazon AWS FY2027–2028 growth guidance raised to above 40%, with capex also revised upward

Why did third-quarter profit outshine revenue?

Amazon’s third-quarter net sales were 201.9 billion dollars, up 12.1% year over year, slightly below Visible Alpha consensus of 202.3 billion dollars; GAAP operating profit was 28.1 billion dollars, above consensus of 26.2 billion dollars by 7.7%. The earnings beat was mainly attributable to AWS and North America, rather than a significant revenue beat.
AWS third-quarter sales were 46 billion dollars, up 39.3% year over year, accelerating from 36.8% in the second quarter and exceeding consensus of about 37.7%; operating profit was 17.8 billion dollars, up 55.4% year over year, with operating margin rising from 34.6% in the same quarter last year to 38.7%. North America operating profit was 8.7 billion dollars, up 82.1% year over year and 12.8% above consensus.

Management expects AWS year-over-year growth to exceed 40% in both FY2027 and FY2028, above market consensus of 35% and 31%. AWS backlog rose from 496 billion dollars at the end of the second quarter to 578 billion dollars at the end of the third quarter, up 17% quarter over quarter; management attributed the growth to demand for AI and cloud services and noted that known new capacity came online during the period.
HSBC sees improving AWS profitability as key to its target-price increase, raising its GAAP operating profit forecasts for FY2026–FY2028 by 2%–12%, lifting its target price from 310 dollars to 325 dollars, and maintaining its Buy rating.

Third-quarter capex was 77.3 billion dollars, above Visible Alpha consensus of 58.2 billion dollars; free cash flow was negative 42.4 billion dollars, below HSBC’s prior estimate of negative 32.2 billion dollars and far weaker than consensus of positive 1.3 billion dollars. Profit growth and weaker cash flow coexisted, with the direct reason being that investment spending during the quarter was higher than expected.
The company maintained its FY2026 capex guidance of 220 billion dollars. HSBC expects fourth-quarter capex to fall to 47.8 billion dollars and free cash flow to turn positive at 17.5 billion dollars; however, its capex forecasts for FY2027 and FY2028 were also raised by about 19% to 320 billion dollars and 384 billion dollars, respectively, reflecting the ongoing investment required for AWS expansion.

The midpoint of fourth-quarter revenue guidance was 243.5 billion dollars, broadly in line with Visible Alpha consensus of 244.4 billion dollars; the midpoint of operating profit guidance was 31 billion dollars, 5.8% below consensus of 32.9 billion dollars. However, the upper end of guidance, at 33.5 billion dollars, was above consensus by 1.8%; Amazon had also exceeded the upper end of its own operating profit guidance for 16 consecutive quarters, leading HSBC to judge that actual results still had room to exceed expectations.
Advertising revenue growth slowed from 26.2% in the second quarter to 10.9% in the third quarter. Prime Day promotions were moved forward from 2025’s July to June 2026, shifting more advertising revenue into the second quarter; HSBC’s analysis indicates that, excluding this timing effect, third-quarter advertising revenue growth was 19.4%. Management expects advertising growth to recover to the high teens in the fourth quarter, while HSBC estimates 17%.