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Amazon Inks $1B SNPS Deal to Power AWS Custom Chips: Should You Hold?
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Key Takeaways
Amazon signed a $1B plus Synopsys deal to accelerate custom chip design and expand AWS silicon capabilities.
AWS revenues grew 37% to $42.2B in Q2, while its backlog reached $496B with triple-digit growth.
Amazon raised 2026 capex to $220B as competition and capacity constraints weigh on near-term prospects.
Amazon (AMZN - Free Report) has deepened its custom silicon push by signing a strategic, multi-year intellectual property agreement with Synopsys (SNPS - Free Report) , valued at more than $1 billion, to accelerate chip design for Amazon Web Services (AWS). Amazon will serve as the lead customer for Synopsys' application-optimized silicon IP and expand its use of Synopsys' electronic design automation, simulation and agentic AI tools. The deal builds on a collaboration spanning more than 15 years and supports Amazon's purpose-built chips, including Nitro for cloud security and networking, Graviton for general-purpose computing and Trainium for AI training and inference.
Custom silicon is becoming a key AWS differentiator. The companies will accelerate multiphysics solutions on Trainium and Graviton and apply AI across silicon-to-system engineering workflows. Synopsys will adopt Amazon EC2 and Amazon Bedrock for its own product development, creating a two-way commercial relationship. Amazon's chips business has already surpassed a $25 billion annual revenue run rate, growing at triple-digit percentages year over year. Graviton is used by 98% of the top 1,000 EC2 customers, while Trainium has secured multi-year, multi-gigawatt commitments from Anthropic and OpenAI.
AWS AI Momentum Strengthens
Recent announcements reinforce this momentum. In August, AWS and NVIDIA unveiled plans to deploy an additional 2 million Blackwell Ultra, Rubin and Rubin Ultra GPUs across AWS infrastructure in 2027-2028, along with Vera CPU support. In September, AWS agreed to acquire DuckLabs, the company behind DuckDB, and expanded its Salesforce collaboration to bring AWS frontier agents into Slack. AWS also launched Agentic Grid Planning for utilities, developed with Duke Energy, and introduced energy-focused AI workflows for Amazon Quick.
AWS revenues grew 37% year over year to $42.2 billion in the second quarter of 2026, its fastest growth in 18 quarters, taking the annualized revenue run rate to $169 billion. Segment operating margin expanded to 39.4% from 32.9% a year ago. The AWS backlog reached $496 billion, growing at a triple-digit percentage rate and offering solid multi-year revenue visibility. AWS' AI business also crossed a $25 billion annual revenue run rate, while advertising revenues rose 26% to $19.8 billion.
The Zacks Consensus Estimate for AMZN's 2026 earnings is pegged at $13.01 per share, indicating an 81.45% increase from the figure reported in the year-ago period. The strong expected earnings growth, aided by AWS margin expansion and advertising strength, supports the long-term thesis.
For the third quarter of 2026, Amazon expects net sales between $197 billion and $202 billion, indicating 9-12% year-over-year growth. Excluding the impact of Prime Day, which shifted into the second quarter this year, growth would be nearly 400 basis points higher. Operating income is projected between $22.5 billion and $26.5 billion, up from $17.4 billion in the year-ago quarter. Foreign exchange is expected to have an unfavorable impact of nearly 80 basis points.
However, the heavy investment cycle remains a near-term concern. Amazon raised its 2026 cash capital expenditure outlook to roughly $220 billion from about $200 billion, primarily for AWS and generative AI, with higher memory costs also contributing. Cash capex was $53.1 billion in the second quarter alone. Trailing 12-month free cash flow turned into an outflow of $7.6 billion against an inflow of $18.2 billion a year ago, while long-term debt nearly doubled to $128.9 billion from the end of 2025. Management also indicated that capacity may still fall short of demand this year.
Amazon shares have returned 6.8% in the year-to-date period, in contrast to the Zacks Internet – Commerce industry’s decline of 0.7%. The Zacks Retail-Wholesale sector has declined 4.3% in the said time frame.
However, competition in the cloud market remains intense and rapidly evolving. Microsoft (MSFT - Free Report) is leveraging its Azure platform and deep enterprise relationships, while Microsoft's AI partnerships continue to attract large customers. Alphabet (GOOGL - Free Report) -owned Google is gaining traction through its data analytics strength and custom TPU chips, making Google a formidable AI infrastructure rival.
Oracle has emerged as an aggressive challenger, with its cloud infrastructure winning large AI training contracts, as it continues to expand its multicloud partnerships. Microsoft, Google and Oracle are all ramping up AI infrastructure spending, which could pressure pricing and margins across the industry. AWS' lead in custom silicon, reinforced by the Synopsys deal, offers a structural cost advantage, but defending market share against these rivals will require sustained heavy investment in capacity.
AMZN's Year-to-date Price Performance
Image Source: Zacks Investment Research
Premium Valuation Calls for Patience
From a valuation standpoint, AMZN stock appears overvalued, trading at a forward 12-month price/earnings ratio of 22.37X, higher than the industry’s 20.11X. Amazon has a Value Score of D. The premium reflects confidence in AWS-led growth but leaves limited room for error if capex returns take longer to materialize.
AMZN's Valuation
Image Source: Zacks Investment Research
Conclusion
Amazon's Synopsys deal, fast-growing chips business, accelerating AWS growth and $496 billion backlog support its long-term prospects. However, elevated capex, negative free cash flow, capacity constraints and intensifying competition temper near-term upside. Given the premium valuation, existing investors should hold the stock, while new investors may wait for a better entry point. Amazon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
View the Zacks #1 Rank List
Image: Bigstock
Amazon Inks $1B SNPS Deal to Power AWS Custom Chips: Should You Hold?
Key Takeaways
Amazon (AMZN - Free Report) has deepened its custom silicon push by signing a strategic, multi-year intellectual property agreement with Synopsys (SNPS - Free Report) , valued at more than $1 billion, to accelerate chip design for Amazon Web Services (AWS). Amazon will serve as the lead customer for Synopsys' application-optimized silicon IP and expand its use of Synopsys' electronic design automation, simulation and agentic AI tools. The deal builds on a collaboration spanning more than 15 years and supports Amazon's purpose-built chips, including Nitro for cloud security and networking, Graviton for general-purpose computing and Trainium for AI training and inference.
Custom silicon is becoming a key AWS differentiator. The companies will accelerate multiphysics solutions on Trainium and Graviton and apply AI across silicon-to-system engineering workflows. Synopsys will adopt Amazon EC2 and Amazon Bedrock for its own product development, creating a two-way commercial relationship. Amazon's chips business has already surpassed a $25 billion annual revenue run rate, growing at triple-digit percentages year over year. Graviton is used by 98% of the top 1,000 EC2 customers, while Trainium has secured multi-year, multi-gigawatt commitments from Anthropic and OpenAI.
AWS AI Momentum Strengthens
Recent announcements reinforce this momentum. In August, AWS and NVIDIA unveiled plans to deploy an additional 2 million Blackwell Ultra, Rubin and Rubin Ultra GPUs across AWS infrastructure in 2027-2028, along with Vera CPU support. In September, AWS agreed to acquire DuckLabs, the company behind DuckDB, and expanded its Salesforce collaboration to bring AWS frontier agents into Slack. AWS also launched Agentic Grid Planning for utilities, developed with Duke Energy, and introduced energy-focused AI workflows for Amazon Quick.
AWS revenues grew 37% year over year to $42.2 billion in the second quarter of 2026, its fastest growth in 18 quarters, taking the annualized revenue run rate to $169 billion. Segment operating margin expanded to 39.4% from 32.9% a year ago. The AWS backlog reached $496 billion, growing at a triple-digit percentage rate and offering solid multi-year revenue visibility. AWS' AI business also crossed a $25 billion annual revenue run rate, while advertising revenues rose 26% to $19.8 billion.
The Zacks Consensus Estimate for AMZN's 2026 earnings is pegged at $13.01 per share, indicating an 81.45% increase from the figure reported in the year-ago period. The strong expected earnings growth, aided by AWS margin expansion and advertising strength, supports the long-term thesis.
Amazon.com, Inc. Price and Consensus
Amazon.com, Inc. price-consensus-chart | Amazon.com, Inc. Quote
Q3 Guidance and Capex Plans
For the third quarter of 2026, Amazon expects net sales between $197 billion and $202 billion, indicating 9-12% year-over-year growth. Excluding the impact of Prime Day, which shifted into the second quarter this year, growth would be nearly 400 basis points higher. Operating income is projected between $22.5 billion and $26.5 billion, up from $17.4 billion in the year-ago quarter. Foreign exchange is expected to have an unfavorable impact of nearly 80 basis points.
However, the heavy investment cycle remains a near-term concern. Amazon raised its 2026 cash capital expenditure outlook to roughly $220 billion from about $200 billion, primarily for AWS and generative AI, with higher memory costs also contributing. Cash capex was $53.1 billion in the second quarter alone. Trailing 12-month free cash flow turned into an outflow of $7.6 billion against an inflow of $18.2 billion a year ago, while long-term debt nearly doubled to $128.9 billion from the end of 2025. Management also indicated that capacity may still fall short of demand this year.
AMZN Shares Outperform Amid Stiff Cloud Competition
Amazon shares have returned 6.8% in the year-to-date period, in contrast to the Zacks Internet – Commerce industry’s decline of 0.7%. The Zacks Retail-Wholesale sector has declined 4.3% in the said time frame.
However, competition in the cloud market remains intense and rapidly evolving. Microsoft (MSFT - Free Report) is leveraging its Azure platform and deep enterprise relationships, while Microsoft's AI partnerships continue to attract large customers. Alphabet (GOOGL - Free Report) -owned Google is gaining traction through its data analytics strength and custom TPU chips, making Google a formidable AI infrastructure rival.
Oracle has emerged as an aggressive challenger, with its cloud infrastructure winning large AI training contracts, as it continues to expand its multicloud partnerships. Microsoft, Google and Oracle are all ramping up AI infrastructure spending, which could pressure pricing and margins across the industry. AWS' lead in custom silicon, reinforced by the Synopsys deal, offers a structural cost advantage, but defending market share against these rivals will require sustained heavy investment in capacity.
AMZN's Year-to-date Price Performance
Image Source: Zacks Investment Research
Premium Valuation Calls for Patience
From a valuation standpoint, AMZN stock appears overvalued, trading at a forward 12-month price/earnings ratio of 22.37X, higher than the industry’s 20.11X. Amazon has a Value Score of D. The premium reflects confidence in AWS-led growth but leaves limited room for error if capex returns take longer to materialize.
AMZN's Valuation
Image Source: Zacks Investment Research
Conclusion
Amazon's Synopsys deal, fast-growing chips business, accelerating AWS growth and $496 billion backlog support its long-term prospects. However, elevated capex, negative free cash flow, capacity constraints and intensifying competition temper near-term upside. Given the premium valuation, existing investors should hold the stock, while new investors may wait for a better entry point. Amazon currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.