Most people think of Amazon (NASDAQ:AMZN) as the place their packages come from. The part of the company drawing the most attention right now sells something far less visible: custom AI chips. In the second quarter of 2026, Amazon Web Services (AWS) said its chips business and its AI business had each passed a $25 billion annual revenue run rate, and both were growing at triple-digit rates.
AWS is Amazon’s cloud arm. It rents computing power, storage, and software tools to businesses and charges for what they use. Its homegrown Trainium chips give customers a way to train and run AI models on Amazon’s own hardware rather than someone else’s. The catch is the bill. Amazon is pouring so much into data centers that free cash flow has turned negative, though that aggressive growth spend is precisely why it remains a core holding among the 10 Best Growth Stocks to Buy Now According to Billionaires. Whether that’s a smart bet or an overreach comes down to one thing: how much of the new capacity is already spoken for.
The Customers Say a Lot
The best evidence for Trainium’s pull is who’s signing up. Anthropic and OpenAI have both made multi-year, multi-gigawatt commitments to the chip, according to Amazon, and companies such as Uber and Pinterest have adopted it too. Deals measured in gigawatts tie a customer’s AI plans to Amazon’s hardware for years.
Amazon has done this before. Graviton, its general-purpose processor, is used by 98% of the top 1,000 customers of EC2, and revenue commitments for Graviton rose nearly 3x from the prior quarter. Owning the silicon lets AWS control its costs and supply while driving higher margins, a core reason Amazon remains a top holding among the 10 Best Cloud Computing Stocks to Buy According to Billionaires.
AWS Found Another Gear
The chip story shows up in the headline numbers. AWS sales grew 37% to $42.2 billion in the second quarter, which CEO Andy Jassy described as the unit’s fastest growth in 18 quarters. AWS now runs at a $169 billion annualized revenue rate.
AWS operating income reached $16.6 billion, up from $10.2 billion a year earlier, good for a 39.4% margin, while customers spent more on Amazon Bedrock than in all prior quarters combined. Advertising provided a powerful second engine, climbing 26% to $19.8 billion. That combination of high-margin cloud services, expanding ad real estate, and massive AI alliances keeps Amazon anchored among the 10 Stocks With New Strategic Partnerships Investors Should Watch.
Can Amazon Keep Spending Like This?
The objection comes straight from Amazon’s own numbers. Purchases of property and equipment hit $54.2 billion in the second quarter, up from $32.2 billion a year earlier. Over the trailing 12 months, free cash flow was an outflow of $7.6 billion, versus an inflow of $18.2 billion the year before, and Amazon tied that swing mainly to AI investment.
That’s a real cost. If you own the stock, every new gigawatt of capacity has to find a paying customer. Still, trailing operating cash flow rose 33% to $161.4 billion. The cash drain is a spending choice, not a sign of a weakening core, but it leaves little cushion if AI demand cools, even as major growth investors continue to count it among the 10 Best AI Stocks to Buy According to Billionaire Stanley Druckenmiller.
Cheap Next to Its Past, Not Its Peers
At 31.24 times forward earnings, as of October 12, Amazon looks far cheaper than its own history, with a five-year average P/E of 158.85. That long-run figure comes from years when Amazon reinvested nearly everything and reported thin profits, so the gap mostly says the company now earns real money. Next to the sector P/E of 14.80, though, investors are clearly paying a premium for Amazon’s growth.
Then there’s the wrinkle: expected EPS growth of (18.33)% in 2027. Part of the explanation sits in the second quarter itself. Net income of $62.6 billion, or $5.75 per diluted share, included $53.4 billion of non-operating gains, primarily from Amazon’s investments in Anthropic. Earnings lifted by investment gains make a tough comparison for the following year. That’s why operating income of $27.5 billion, up 43%, is the cleaner read on the business and the one this analysis leans on.
Even with that context, paying more than 30 times earnings for a profit line expected to shrink only works if AWS keeps compounding. That high-multiple setup is the same bet investors are making across the Top 10 AI Stocks That Will Skyrocket, where market expectations demand relentless top-line cloud growth to justify current valuations. Hedge fund interest ticked up, with 369 funds holding the stock in the most recent quarter, up from 353 in the prior one. Short interest sits at just 0.88% of the float, which points to relatively limited bearish positioning.
Trainium Holds the Answer
The evidence points to a business whose most important engine is speeding up, not stalling. AWS growth of 37%, a 39.4% margin, and gigawatt-scale chip commitments from two leading AI labs suggest the spending is chasing real demand. The price shows up in negative free cash flow and an EPS forecast that looks gloomy against a base inflated by investment gains.
The setup suits patient growth investors who are comfortable owning a capital-heavy AI build-out at a premium to the sector. If AWS growth slips back while capital spending keeps climbing, that premium gets much harder to defend.
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