By Deborah Mary Sophia and Greg Bensinger
July 30 (Reuters) – Amazon delivered its strongest cloud growth in more than four years and raised its annual capital spending forecast, bolstering its argument that heavy investment in AI is generating sufficient demand to warrant the outlays.
The results helped answer a key question hanging over Amazon and its Big Tech peers: whether hundreds of billions of dollars being poured into AI data centers and chips are producing adequate returns.
Amazon CEO Andy Jassy said demand remained so strong that the company still lacked enough computing capacity to serve customers despite raising its capital spending forecast by 10% to $220 billion.
Shares in the Seattle-based online retailer climbed nearly 9% after the market’s close, following a 3.9% rise during the trading session.
Revenue at its cloud computing unit, Amazon Web Services, jumped 37% to $42.2 billion in the second quarter ended June 30, handily beating analysts’ consensus estimate of a 31.21% increase, according to data compiled by LSEG.
“AWS is booming,” Jassy said in a statement, noting it was the unit’s fastest growth in 18 quarters. “Our AI and chips businesses each eclipsed run rates of more than $25 billion.”
He said the cost of purchasing memory chips was a prime factor in driving the company’s capital spending forecast higher.
“Even at that amount, we will still not have enough capacity to meet all of the demand we have in 2026,” he said on a call with investors. “I believe this dynamic will also be true in 2027 too.”
AWS contract backlogs at the end of the quarter stood at $496 billion, up from $364 billion in the prior three-month period.
Amazon’s free cash flow turned sharply negative. The company burned $7.6 billion of cash on a trailing 12-month basis in the second quarter, compared to $18.2 billion in free cash flow a year earlier.
Other Big Tech competitors, including Microsoft, Alphabet and Meta also reported big drops in free cash flow as they ramp up spending.
Still, the strong showing from the world’s top cloud services provider mirrored solid performances from rivals Microsoft and Alphabet, both of which also comfortably beat Wall Street estimates for cloud revenue.
“There were concerns about market share losses on AWS, but that’s been put to bed now,” said Dan Morgan, portfolio manager at Synovus Trust. “It just gives more evidence that AWS’s lead is still intact. The AI tide is rising all boats here.”
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The upbeat results could help quell some concerns over Big Tech’s relentless AI investments — set to exceed $700 billion this year — that have strained cash flows at the traditionally cash-rich companies and sparked worries that they might be overbuilding capacity.
Companies including Amazon, however, have argued that the spending is crucial. The outlays, they say, help ease capacity constraints that have prevented them from fully meeting AI-driven demand, pointing to their ballooning contract backlogs.
Jassy sought to explain the company’s massive capital outlay on the call. Amazon starts spending on data centers roughly two years before they open, which creates a period where cash is flowing out but revenue has not yet arrived, he said.
Once operational, however, those facilities can generate revenue for 30 years while AI servers typically recoup their cost in less than three years and then continue generating profits for another two to three years, he added.
His comments echoed those of Meta CEO Mark Zuckerberg on Wednesday.
Jassy said the “lion’s share” of AWS compute capacity for 2027 had already been reserved by its customers, adding the company has “quite a bit of capacity” reserved for 2028 as well.
AWS has benefited from a growing roster of partnerships this year, including massive cloud infrastructure and chip supply deals with OpenAI, Anthropic, Meta, Pinterest and Snowflake.
In its e-commerce business, Amazon has been rolling out faster delivery services globally and expanding to more rural areas of the U.S. to draw more shoppers.
The company also held its annual Prime Day event in the quarter. Customers snapped up discounted electronics, appliances and everyday essentials, with an Adobe Analytics estimate pegging total spending at over $26.4 billion.
Advertising, another closely watched metric, showed continued strength as Amazon packs more of its properties, including Prime Video and its shopping website, with marketing messages. The firm said ad sales rose 26% from a year earlier to $19.8 billion.
(Reporting by Deborah Sophia in Bengaluru and Greg Bensinger in San Francisco; Editing by Sriraj Kalluvila, Nia Williams and Jamie Freed)
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