Amazon's Report Passed Both Tests I Set for It. I'd Buy More of the Stock Now.
The e-commerce and cloud giant's report cleared both hurdles I set for it. Is it time to buy the second half?
Shares of Amazon (AMZN) are currently trading around $250, which is over 10% lower than their August 3 closing high of $284.02. Despite this, the stock has shown resilience, with AWS (Amazon Web Services) growing by 39% year-over-year to $46.0 billion in the third quarter. This growth has continued for six straight quarters, with AWS operating income increasing by 55% to $17.8 billion and the operating margin reaching 38.7%.
AWS has a staggering backlog of $578 billion, more than doubling from the previous year, and management expects growth of over 40% in both 2027 and 2028.
Amazon's third-quarter operating income of $28.1 billion was up 61% from the previous year and surpassed even the top of the management's guided range. The operating margin improved to 13.9% from 9.7% a year ago, although this appears slightly inflated when considering two special charges from the prior quarter. Excluding those charges, AWS operating income would have been $21.7 billion, resulting in a 29% growth rate.
The retail segment also performed well, with North America segment operating income rising to $8.7 billion from $7.3 billion a year earlier, or around 20% growth on sales that increased by 6%. However, Amazon's spending on capital expenditures for data centers, servers, chips, and warehouses reached $75.9 billion in the third quarter alone, up more than double from the previous year. Management expects to spend around $220 billion on capital expenditures by 2026, up from about $128 billion in 2025.
The company's free cash flow turned negative at $42.4 billion over the past 12 months, up from negative $7.6 billion in the second quarter but a significant improvement from the positive $14.8 billion in the previous year. Operating cash flow, however, grew by 29% to $168.3 billion over the same period. While Amazon's free cash flow might stay negative for a while due to AI development spending, the company is still spending more than it brings in, mainly due to AI investments.
Despite this, the stock appears to be fairly valued at around $250, with a price-to-earnings ratio of about 23 on analysts' 2027 estimates. The author recommends buying the second half of the position, anticipating that free cash flow numbers will look rough in the near term.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
