J.P. Morgan: AWS growth is accelerating. Why does JPMorgan expect Amazon’s free cash flow to turn sharply negative next year?

Why did faster AWS growth still fall short of expectations?

In the third quarter of 2026, AWS revenue grew approximately 39% year over year, up from 37% in the second quarter and its fastest pace in about five years, but below JPMorgan’s forecast of 41% and buy-side expectations of approximately 42%. Annualized third-quarter revenue put AWS at a run rate of 184 billion dollars.
Amazon expects AWS to grow more than 40% in both 2027 and 2028, above market consensus estimates of 35% and 30%, respectively. The company also believes AWS revenue could reach 1 trillion dollars in the next 5 to 10 years.
AWS backlog reached 578 billion dollars at the end of the third quarter, up 189% year over year and 17% quarter over quarter. The company said most capacity is sold well into 2028, while some spot and on-demand capacity remains available. JPMorgan believes this demand visibility supports the company’s growth outlook and investment plans.

AWS’s AI business revenue grew more than 100% year over year in the third quarter. As more AI workloads entered production, customer demand for computing, storage and networking also increased, and core computing and storage revenue growth reached its fastest pace in years.
AWS’s third-quarter margin expanded by approximately 4 percentage points to 38.7%, but JPMorgan expects further improvement to be uneven: a rising share of lower-margin AI revenue and higher component prices gradually flowing through depreciation into profit and loss could both create pressure. The bank expects AWS margins to be near 40% in the future.

Amazon maintained its capital expenditure outlook of approximately 220 billion dollars for 2026, even though third-quarter spending of 77 billion dollars was 31% above market consensus. JPMorgan attributed the elevated spending in that quarter to timing. The company expects investment to increase significantly in 2027.
JPMorgan raised its 2027 capital expenditure forecast from 366 billion dollars to 395 billion dollars, an increase of 77% from the projected 2026 level, and expects it to rise further to 476 billion dollars in 2028. The bank expects free cash flow of approximately negative 128 billion dollars in 2027, with investment supported primarily by operating cash flow, debt markets and leasing opportunities.
Returns are key to supporting high investment: Amazon says servers and networking equipment pay for themselves in less than three years and have useful lives of five to six years; data centers have useful lives of approximately 30 years and can accommodate five to six generations of chips.

Combined first-party and third-party retail revenue grew 2.5% year over year at constant currency in the third quarter, down from 15.4% in the second quarter, primarily because most major markets, including the United States, scheduled Prime Day in the second quarter. Units sold still grew 12% in the third quarter.
Advertising revenue growth at constant currency slowed from 26% year over year in the second quarter to 12% in the third quarter, with the shift in Prime Day timing creating a drag of approximately 8.5 percentage points. The company expects advertising growth to rebound to near 20% in the fourth quarter, though still below the recent level of more than 20%.
Amazon guided for fourth-quarter operating profit of 28.5 billion to 33.5 billion dollars, with the midpoint below investor expectations and JPMorgan’s forecast. A delay in capitalizing Project Leo had an impact of approximately 1 billion dollars, while slower advertising growth and higher fuel and long-haul transportation costs also weighed on the outlook. JPMorgan maintained its Overweight rating and set a price target of 365 dollars for December 2027.