Amazon's Business Is Exploding. Its Free Cash Flow Isn't?

The Number That Stops You in Your Tracks

Amazon is expected to spend approximately $220 billion on capital expenditures in 2026. Let that sink in for a moment. That is almost 3 times what Amazon spent just 2 years ago. In 2024 the number was $77.7 billion. In 2025 it was $128.3 billion. And now management has raised their 2026 estimate by roughly 10% to $220 billion — a figure that is larger than Amazon's entire quarterly revenue. The company is spending at a pace that would have seemed unimaginable even 18 months ago.

The result is that Amazon's free cash flow — the cash the business generates after all that spending — has gone from $38.2 billion in 2024 to $11.2 billion in 2025 to negative $7.6 billion over the trailing 12 months. Operating cash flow has never been higher. Spending has just grown faster. For investors trying to understand whether this is a problem or an opportunity, that distinction is everything.

The Business Itself Has Never Been Stronger

Before worrying about the cash flow, you have to understand what the underlying business is doing — because the numbers are genuinely extraordinary. In Q2 2026 Amazon reported total revenue of $200.6 billion, up 20% year over year. Operating income came in at $27.5 billion, up 43%. Net income was reported at $62.6 billion — but that number is heavily distorted by Amazon's investment in Anthropic, which produced roughly $50.5 billion of mark-to-market valuation gains in a single quarter. Strip that out and the operating business tells the real story: strong, accelerating, and firing on almost every cylinder.

AWS is the headline. Revenue of $42.2 billion grew 37% year over year — the fastest growth rate in 18 quarters. That acceleration matters because AWS had been viewed by some investors as a maturing business. It is not. AWS is reaccelerating sharply, driven almost entirely by AI workloads. And the operating income from AWS was $16.6 billion — up 64% — at a 39.4% operating margin. AWS represents about 21% of Amazon's total revenue but produces approximately 61% of its total operating profit. It is the economic engine that funds everything else.

Outside of AWS the story is nearly as strong. North America retail revenue grew 16% to $116.2 billion with operating margins expanding to nearly 8%. Advertising revenue hit $19.8 billion, up 26%, putting Amazon on a pace approaching $80 billion in annual ad revenue — making it the third largest digital advertising platform in the world behind only Meta and Google. Third-party seller services grew 16%. Subscription services grew 12%. The revenue mix is gradually shifting toward higher-margin businesses and the profitability improvements are real.

Why Amazon Is Spending $220 Billion

Amazon is not spending $220 billion because the business is struggling. It is spending $220 billion because AWS is capacity constrained and growing faster than its infrastructure can currently support. Management has said explicitly that demand for AI compute exceeds what Amazon can supply today, and that the spending is primarily directed at building the infrastructure to meet that demand.

The AI numbers inside AWS are striking. Amazon says its AI business within AWS now exceeds $25 billion in annualized revenue and is growing at a triple-digit percentage rate. Even more surprising: Amazon's custom chip business — its Trainium and Graviton processors developed to reduce dependence on Nvidia — has also crossed $25 billion in annualized revenue with triple-digit growth. Amazon has quietly built one of the world's largest semiconductor businesses inside AWS. And Trainium2 capacity was largely sold out while portions of Trainium3 and even Trainium4 capacity have already been reserved by customers before broader availability.

The customer commitments backing this spending are significant. Anthropic has agreed to spend more than $100 billion with AWS over the next decade and already uses more than 1 million Trainium2 chips to train and serve Claude. OpenAI has agreed to spend approximately $100 billion with AWS over 8 years and plans to use roughly 2 gigawatts of Trainium capacity beginning in 2027. Amazon has secured economic relationships with both of the most prominent frontier AI labs simultaneously. Amazon says it has more than $225 billion of revenue commitments for Trainium specifically. The capex is large but much of it is already underwritten by customer contracts.

The Valuation Trap Worth Understanding

One thing every Amazon investor needs to understand right now: the headline earnings numbers are not what they appear. Amazon's reported trailing P/E looks surprisingly low — around 21 times — which would make it appear cheap relative to its growth rate. But a large portion of those reported earnings came from unrealized investment gains on Anthropic, not from selling products, running AWS, or placing ads. Amazon recorded roughly $62.8 billion in upward Anthropic valuation adjustments in the first half of 2026 alone. Those are paper gains, not operating cash.

A cleaner way to look at the business is through operating income. Amazon generated roughly $93.7 billion of trailing operating income through June. At a market cap of approximately $2.83 trillion that puts the business at around 30 times trailing operating income — a very different picture from the 21 times headline P/E. This does not mean Amazon is overvalued. It means investors need to look past the reported earnings number to understand what they are actually paying for. The business is exceptional. The valuation is not as cheap as it first appears.

The Bull and Bear Case in Plain Terms

The bull case for Amazon right now is straightforward. AWS is reaccelerating into the largest infrastructure buildout in business history. The company has locked in demand commitments from the most important AI companies in the world. Its custom chip business is already at $25 billion in run-rate revenue and reduces long-term dependence on Nvidia. Retail margins are expanding, advertising is approaching $80 billion annually, and same-day delivery is reaching more than 2,300 cities and turning Amazon into a grocery and everyday essentials business at scale. The negative free cash flow is not a sign of weakness — it is the fingerprint of a company investing aggressively in its next decade of earnings power.

The bear case is equally clear. $220 billion in annual capex changes the fundamental economics of the business. If cloud compute prices decline as models become more efficient, Amazon could spend hundreds of billions building infrastructure that earns lower returns than expected. AWS is growing fast but Google Cloud is gaining market share, having moved from 13% to 15% of the global cloud market in a single year while AWS slipped from 30% to 28%. Regulatory risk is real — Amazon already paid a $2.5 billion FTC settlement over Prime practices and faces ongoing antitrust scrutiny of its marketplace. And tariff exposure through third-party Chinese sellers could hit multiple revenue streams simultaneously. The question is not whether Amazon is a great business. It is whether the capex cycle earns returns that justify the investment.

Stock Analyzer: AMZN

Running the stock analyzer with a 12% revenue growth assumption, a 13% profit margin, a 13% free cash flow margin, and a PE and P/FCF of 24, the mid fair value comes out at $386.79 against a current price of $261.06. The implied current price return at the mid scenario is 14.06% annually over the 10-year period. The 10-year historical ROIC of 10.62% and 5-year revenue growth of 11.84% support the 12% growth assumption as reasonable and grounded in what the business has actually delivered.

The critical caveat here — and this applies to Amazon more than almost any other company in the market right now — is that the free cash flow margin assumption of 13% is a normalized future estimate, not a description of today's reality. Over the trailing 12 months Amazon's actual free cash flow margin was negative 1.5%. I am asking what Amazon's economics look like once the AI infrastructure buildout is complete and the $220 billion in annual capex normalizes to a lower maintenance level. If that normalization happens on the timeline management implies, $386.79 looks like a compelling fair value. If the capex cycle proves more permanent than temporary — if AI infrastructure requires this level of spending indefinitely — the picture is more complicated.

That is the honest framework for thinking about Amazon right now. The business is genuinely one of the most extraordinary collections of assets ever assembled under one company. The question every investor has to answer for themselves is whether $220 billion a year in AI spending is a temporary sacrifice that unlocks the next generation of earnings power, or a permanent change in what it costs to compete. Tag me in the community and let's talk through where you land on that question.

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