Morgan Stanley: Amazon AWS growth falls short of Morgan Stanley’s forecast as retail efficiency improves amid faster investment

AWS growth missed expectations. Why is Morgan Stanley still optimistic?

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 approximately $3.8 billion quarter over quarter, AWS’s second-largest single-quarter increase on record.
The demand pipeline exceeded the bank’s expectations: AWS backlog reached $578 billion, up $82 billion from the previous quarter and well above its forecast of $17 billion. Management expects AWS revenue growth to exceed 40% in both 2027 and 2028.
Morgan Stanley estimates that if company-wide fourth-quarter revenue reaches the top of guidance, AWS year-over-year growth would be in the mid-40% to 40% range. The company also plans to sell Trainium chips to third-party data centers in 2027, which the bank believes could add another source of earnings growth.

Amazon’s third-quarter capital spending was approximately $77 billion, above Morgan Stanley’s forecast of $60 billion and the average of approximately $50 billion over the previous two quarters. The bank believes this reflects chip and rack deliveries and the opening of new data centers, which could generate revenue once fully utilized.
Investment also comes with cash flow pressure: third-quarter free cash flow was negative $33.5 billion, below the bank’s forecast of negative $11.2 billion. Morgan Stanley expects free cash flow of negative $81.4 billion and negative $15 billion in 2027 and 2028, respectively.
The bank cut its AWS revenue forecasts for both 2027 and 2028 by approximately 3%, implying growth of 44% and 42%, respectively. It also expects AWS operating margins of approximately 40% and 41%, respectively.

In the third quarter, Amazon lowered its cost to serve by improving inventory placement, shortening delivery distances and consolidating packages. Despite approximately $880 million of pressure from fuel inflation and higher line-haul rates, transportation costs rose 11%, below the 12% growth in units sold.
Fulfillment and transportation costs per unit fell 3% and 1% year over year, respectively. Morgan Stanley believes improved fulfillment efficiency and the use of robotics could continue to reduce costs.
Meanwhile, the expected start of capitalization for the Leo satellite business has been pushed back from the fourth quarter of 2026 to the first quarter of 2027. The bank estimates this adds approximately $200 million of sequential pressure to North American operating profit in the fourth quarter of 2026, approximately $1 billion more than it previously forecast. Even so, it still expects a North American operating margin of approximately 10%.

Third-quarter company-wide revenue was $201.9 billion, below Morgan Stanley’s forecast of $205 billion. Operating profit was approximately $28.1 billion, above its forecast of $27.3 billion, but earnings per share of $1.89 were below the forecast of $2.05.
Morgan Stanley cut its 2028 earnings-per-share forecast by approximately 5% to $15.76 and lowered its price target from $350 to $335, while maintaining its Overweight rating and top-pick status. The price target is based on approximately 21 times forecast 2028 earnings.