Amazon.com, Inc. (NASDAQ:AMZN) rose recently after Morgan Stanley named it a top pick and raised its price target to $350 from $335, and the stock now heads into its third-quarter report on October 29. It ranks fourth on our list of the top 10 stocks Jim Cramer and billionaire Ken Fisher like. The question for earnings is whether AWS can grow fast enough to cover a spending plan that has pushed free cash flow below zero. Let’s analyze.
AWS Is Growing Fast and the Backlog Is Growing Faster
AWS revenue rose 37% in the second quarter, well above the 31% analysts expected and the unit’s fastest growth since 2021. The AWS backlog is growing at triple-digit rates, so customers have already signed for a large part of the growth ahead. Amazon’s chip business and AI business are also growing at triple-digit rates. Management said Amazon will not have enough capacity to meet demand in 2026, and expects the same in 2027. The demand Amazon already has for 2028 is striking, CEO Andy Jassy said on the second-quarter call.
Analysts are raising their forecasts. Morgan Stanley now expects AWS revenue to grow 47% in 2027, up from 41%. Consolidated operating income rose 43% in the second quarter, more than double the 20% revenue growth, though that number included one-time gains from tariff refunds and energy contracts. Amazon’s custom chips are now a business of their own, and they cost a lot to build. Click to read the bull and bear case here.
Spending Is Running Ahead of Cash
Amazon raised its 2026 capital spending plan to about $220 billion from $200 billion, and management tied the increase to higher memory prices. Free cash flow over the past 12 months turned negative from positive a year earlier, even though operating cash flow grew 33%. Jassy said Amazon will face free cash flow headwinds until the new data centers start earning.
The funding question is open. Amazon has issued debt this year and says other funding options remain available. Morgan Stanley’s own note lifts its spending forecast for Amazon in 2027 and 2028. Each new quarter of higher spending pushes out the date when free cash flow turns positive. Amazon has a record of turning internal tools into profitable businesses, but this bet is much bigger. Check whether it can pass this $220 billion test here.
Earnings Setup
Second-quarter GAAP earnings per share were $5.75 against an estimate near $1.83. The figure included a large gain on Amazon’s stake in Anthropic. That gain made up most of the $62.6 billion net income, and it can swing up or down in any quarter. The same distortion can show up again in the third quarter.
For the third quarter, Amazon guided revenue to $197 billion to $202 billion, which is growth of about 9% to 12%, down from 20% in the second quarter. Prime Day moved into the second quarter this year, and management said the shift weighs on third-quarter sales growth by roughly 400 basis points. Analyst consensus calls for revenue growth of about 12%, at the top of that range, so the bar is already high.
Valuation
Amazon trades at a forward P/E of 31.6 on normalized earnings, about twice the sector median of 15.2. Analyst consensus calls for normalized earnings per share growth of about 16% in 2026 and about 26% in 2027, with revenue growth of about 15% in both years.
The PEG ratio is 1.52 against a sector median of 1.32, so Amazon costs about 15% more per unit of growth than the typical stock in its sector. If growth came in at half the expected level, the PEG would double to about 3. The premium is justified if earnings keep growing near 20% a year, and that is the assumption buyers are underwriting. How does Amazon’s multiple compare with Microsoft’s? Click to see the side-by-side here.
What October 29 Has to Show
AWS growth supports the spending today, and free cash flow will not catch up until the new capacity starts earning. The report has to show AWS growth holding near its second-quarter pace of 37%, a 2026 spending plan that stays near $220 billion with a first look at 2027, and operating income that holds up as the Prime Day shift weighs on sales. If spending climbs again without faster growth, the cash flow worry gets worse.
Amazon also ranks second on our list of President Trump and Nancy Pelosi Portfolio: Top 4 Picks. Amazon.com, Inc. reports after the market closes on October 29.
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