Amazon (AMZN Quick QuoteAMZN - Free Report) is laying the groundwork for a free cash flow rebound, even as heavy AI spending pressures near-term cash generation. Last month, Amazon announced that Wiwynn will expand its Texas facility to build server systems and racks for Amazon’s data centers, which strengthens its custom hardware supply. On Oct. 2, it committed more than $1 billion over five years to communities that host its data centers through its Built Together program, easing the path for capacity expansion.

Amazon still generates a lot of cash from operations. Trailing 12-month operating cash flow rose 33% to $161.4 billion as of June 30, 2026. However, free cash flow swung to an outflow of $7.6 billion from an inflow of $18.2 billion a year ago. That reflects a $66.1 billion increase in net capital spending, mainly for AI. Second-quarter net sales grew 20% to $200.6 billion, while operating income jumped 43% to $27.5 billion. AWS sales climbed 37% to $42.2 billion.

Strong visibility into future demand supports the spending. AWS backlog reached $496 billion, growing at a triple-digit rate, and 2027 capacity is largely reserved. Most AI capacity is contracted for at least five years. Servers break even in under three years and have a useful life of five to six years, indicating solid cash returns once new data centers go live. The AI and chips businesses each exceeded a $25 billion annual run rate.

For the third quarter, Amazon expects net sales of $197-$202 billion and operating income of $22.5-$26.5 billion, up from $17.4 billion a year ago. However, Amazon now expects 2026 cash capex of about $220 billion, up from $200 billion, partly because of higher memory costs. That signals continued free cash flow headwinds and capacity constraints into 2027.

While near-term free cash flow remains under pressure, Amazon’s surging operating cash flow and contracted AWS demand position the stock to gain as its investment cycle matures.

How Rivals Stack Up on Free Cash Flow

Microsoft (MSFT Quick QuoteMSFT - Free Report) and Alphabet (GOOGL Quick QuoteGOOGL - Free Report) are also balancing cash generation against AI-driven spending. In the June 2026 quarter, Microsoft generated $55.4 billion in operating cash flow against $35.8 billion of capital expenditures, leaving about $19.6 billion in free cash flow. For fiscal 2026, Microsoft’s operating cash flow totaled $182.9 billion. Alphabet, by contrast, posted second-quarter free cash flow of negative $5.9 billion, as quarterly capex of $44.9 billion outpaced $39.1 billion of operating cash flow. Alphabet raised its 2026 capex outlook to $195-$205 billion, while Microsoft continues expanding data center capacity to meet strong Azure cloud demand.

AMZN’s Share Price Performance, Valuation & Estimates

Amazon shares have returned 13% in the year-to-date period, outperforming the Zacks Internet – Commerce industry’s growth of 2.5% and the Zacks Retail-Wholesale sector’s decline of 0.5%.

AMZN’s Year-to-date Price Performance

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From a valuation standpoint, AMZN stock appears overvalued, trading at a forward 12-month price/earnings ratio of 23.39X, higher than the industry’s 20.52X. Amazon has a Value Score of D.

AMZN’s Valuation

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The Zacks Consensus Estimate for AMZN’s 2026 earnings is pegged at $13.02 per share, indicating an 81.59% increase from the figure reported in the year-ago quarter.

Amazon currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.