Citi: AWS growth fell short of some buy-side investors’ high expectations. Why is Citi still raising its Amazon earnings forecasts?

Why did AWS growth draw different reactions?

In the third quarter of 2026, AWS revenue was 46 billion dollars, up 39.3% year over year, compared with 36.8% in the second quarter. It was about 2% above the market consensus but below the higher expectations of some buy-side investors; Amazon shares fell about 7% in after-hours trading following the earnings release.
Amazon management expects AWS revenue growth to exceed 40% year over year in both 2027 and 2028. Citi is therefore more optimistic about the company’s outlook: AI revenue grew at a triple-digit rate year over year in the third quarter, and management said demand still exceeded available infrastructure.

AWS’s order backlog reached 578 billion dollars at the end of the third quarter. Citi believes capacity remains the main constraint on growth and expects AWS computing capacity to double by 2027; the company plans to deploy an additional 2 million Nvidia GPUs by 2028.
The expansion requires substantial funding: Amazon maintained its forecast for 220 billion dollars in cash capital expenditure in 2026; Citi’s model projects capital expenditure of approximately 325.7 billion and 415.9 billion dollars in 2027 and 2028, respectively, further increases from its previous forecasts.

Amazon’s third-quarter total revenue was 201.9 billion dollars, up 12% year over year and in line with market consensus; operating income was 28.1 billion dollars, about 7% above consensus, but earnings per share of 1.89 dollars were below the consensus estimate of 1.96 dollars.
AWS’s operating margin was 38.7%, above Citi’s previous estimate of 35.5%. Citi believes the core AWS business has a margin of around 40%, so the overall AWS margin could remain in the mid-to-high 30% range; however, increased investment during the cycle could also affect margin expansion.
Citi raised its group operating income forecasts for 2027 and 2028 by approximately 2% and 10%, respectively, taking the 2028 forecast to about 208.6 billion dollars. The revision is based on expectations for AI demand, capacity expansion and rapid AWS growth.

North American retail’s third-quarter operating margin rose 3.2 percentage points year over year to 7.7%, which Citi attributed to improved efficiency and lower service costs. Advertising revenue, however, grew 12% year over year excluding currency effects; the slower growth reflected Prime Day’s move to the second quarter. The company expects growth to return to nearly 20% in the fourth quarter.
Fresh food and grocery sales were approximately 250 billion dollars over the 12 months through the third quarter. Customers who buy fresh food through same-day delivery purchase about 7 times as many everyday essential items as other customers, indicating that this business helps increase customer spending on the platform.
Citi maintained its buy rating and 350 dollar price target, based on a price-to-earnings multiple of approximately 23 times its 2028 earnings per share forecast of 15.10 dollars.