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Amazon (AMZN - Free Report) reported a 39% year-over-year surge in Amazon Web Services (“AWS”) revenues to $46 billion in the third quarter of 2026. That was the cloud unit's fastest growth in nearly five years, and it lifted AWS' annualized revenue run rate to $184 billion. The acceleration comes as cloud rivals Microsoft (MSFT - Free Report) , Nvidia (NVDA - Free Report) and Alphabet (GOOGL - Free Report) step up their AI infrastructure push, prompting the question of whether investors should hold the stock or wait for a better entry point.
AWS remained the company's profit engine, with segment operating income rising to $17.8 billion from $11.4 billion a year ago, implying an operating margin of roughly 38.7%. Consolidated net sales grew 12% to $201.9 billion, while operating income climbed to $28.1 billion, translating into a record operating margin of 13.9%. A Prime Day shift into the second quarter reduced third-quarter growth by about 400 basis points.
Amazon shares have returned 12.3% in the year-to-date period, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector's growth of 2.9% and 4.5%, respectively. This outperformance reflects investor confidence in accelerating AWS growth and record consolidated margins, though heavy AI spending and free cash flow pressure have kept the stock's gains relatively measured.
AMZN's Year-to-Date Price Performance
Image Source: Zacks Investment Research
AI Demand Strengthens AWS Fundamentals
AWS' AI portfolio is gaining traction across the enterprise base. Spending by Fortune 500 companies on Amazon Bedrock rose nearly 7X year over year, while total token volume grew nearly 17X. Bedrock added OpenAI's GPT-6 family and Anthropic's latest Claude models. Tens of thousands of customers now use Bedrock AgentCore, and they deployed twice as many agents in the third quarter as in the prior three quarters combined. Amazon also introduced TorchNeuron, enabling developers to run existing PyTorch code on Trainium without rewriting it. Additionally, AWS signed new agreements with Meta, OpenAI, Oracle, Qualcomm, Verizon and NATO, among others.
Recent AWS Developments
Amazon's newsroom highlights steady momentum in October and November 2026. On Oct. 8, AWS launched its Golden Age of Science Accelerator, committing up to $50 million in cloud credits to support the expansion of the Genesis Mission. Classmethod signed a five-year collaboration to help Japanese enterprises adopt AI. Further, AWS expanded Kiro's reach in education through BINUS University in Indonesia. In November, AWS launched Semarak AI Malaysia, a national program bringing AI tools to government officers, students and local software companies. AWS also made its AI-powered security service, Continuum, generally available and agreed to acquire DuckLabs, the company behind DuckDB.
Steep Valuation and Competition in Cloud are Overhangs
From a valuation standpoint, AMZN stock appears overvalued, trading at a forward 12-month price/earnings ratio of 23.43X, higher than the industry's 20.33X. Amazon has a Value Score of D. The premium suggests that much of the near-term AI optimism is already priced in.
AMZN's Valuation Appears Steep
Image Source: Zacks Investment Research
Competitive pressure, however, remains a key watchpoint. Microsoft continues to leverage its enterprise software relationships to win AI workloads, while Alphabet is pairing its cloud platform with in-house AI models and chips. Nvidia, which also signed a new agreement with AWS, plays a dual role as a critical accelerator supplier and a provider of its own cloud services. As Microsoft and Alphabet accelerate data center buildouts and Nvidia deepens its AI computing presence, AWS must sustain innovation and capacity additions to defend market share. Competition, however, is intensifying. Microsoft’s Azure revenues surged 48% to $33.2 billion in the first quarter of fiscal 2027, while Alphabet’s Google Cloud revenues jumped 103% to $30.7 billion in third-quarter 2026, backed by a $561 billion backlog. Nvidia’s Data Center revenues soared 117% to $89 billion in second-quarter fiscal 2027. Although AWS remains the largest cloud platform, Microsoft and Alphabet are growing faster, while Nvidia, also an AWS partner, is ramping its Vera Rubin platform across rival clouds, including Google Cloud and Azure.
Q4 Guidance and Capex Temper AMZN’s Near-Term Visibility
For the fourth quarter of 2026, Amazon expects net sales between $240 billion and $247 billion, indicating 12-16% year-over-year growth, including an unfavorable foreign exchange impact of approximately 60 basis points. Operating income is projected between $28.5 billion and $33.5 billion compared with $25 billion in the year-ago quarter, while advertising revenues are expected to grow in the high teens. Management expects AWS revenue growth to exceed 40% in both 2027 and 2028, signaling robust long-term demand.
However, the investment burden is substantial. Amazon expects 2026 cash capital expenditures of approximately $220 billion, with third-quarter cash capex alone reaching $75.9 billion, primarily for AWS and AI infrastructure. Although trailing 12-month operating cash flow rose 29% to $168.3 billion, free cash flow swung to an outflow of $42.4 billion from an inflow of $14.8 billion a year earlier.
The Zacks Consensus Estimate for AMZN's 2026 earnings is pegged at $12.90 per share, indicating an 79.92% increase from the figure reported in 2025. This strong earnings trajectory supports the share price outlook. Investors should hold AMZN despite the premium because AWS' accelerating, highly profitable growth offers durable long-term earnings power.
Amazon's accelerating AWS growth, expanding AI adoption and record margins provide solid fundamental reasons to stay invested. However, elevated capex, negative free cash flow, intensifying cloud competition and a stretched valuation limit near-term upside. AMZN currently carries a Zacks Rank #3 (Hold), suggesting existing investors should hold the stock while new investors wait for a better entry point. 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 AWS Revenues Up 39% in Q3 as Cloud Rivals Gain Pace: Hold Stock?
Key Takeaways
Amazon (AMZN - Free Report) reported a 39% year-over-year surge in Amazon Web Services (“AWS”) revenues to $46 billion in the third quarter of 2026. That was the cloud unit's fastest growth in nearly five years, and it lifted AWS' annualized revenue run rate to $184 billion. The acceleration comes as cloud rivals Microsoft (MSFT - Free Report) , Nvidia (NVDA - Free Report) and Alphabet (GOOGL - Free Report) step up their AI infrastructure push, prompting the question of whether investors should hold the stock or wait for a better entry point.
AWS remained the company's profit engine, with segment operating income rising to $17.8 billion from $11.4 billion a year ago, implying an operating margin of roughly 38.7%. Consolidated net sales grew 12% to $201.9 billion, while operating income climbed to $28.1 billion, translating into a record operating margin of 13.9%. A Prime Day shift into the second quarter reduced third-quarter growth by about 400 basis points.
Amazon shares have returned 12.3% in the year-to-date period, outperforming the Zacks Internet – Commerce industry and the Zacks Retail-Wholesale sector's growth of 2.9% and 4.5%, respectively. This outperformance reflects investor confidence in accelerating AWS growth and record consolidated margins, though heavy AI spending and free cash flow pressure have kept the stock's gains relatively measured.
AMZN's Year-to-Date Price Performance
Image Source: Zacks Investment Research
AI Demand Strengthens AWS Fundamentals
AWS' AI portfolio is gaining traction across the enterprise base. Spending by Fortune 500 companies on Amazon Bedrock rose nearly 7X year over year, while total token volume grew nearly 17X. Bedrock added OpenAI's GPT-6 family and Anthropic's latest Claude models. Tens of thousands of customers now use Bedrock AgentCore, and they deployed twice as many agents in the third quarter as in the prior three quarters combined. Amazon also introduced TorchNeuron, enabling developers to run existing PyTorch code on Trainium without rewriting it. Additionally, AWS signed new agreements with Meta, OpenAI, Oracle, Qualcomm, Verizon and NATO, among others.
Recent AWS Developments
Amazon's newsroom highlights steady momentum in October and November 2026. On Oct. 8, AWS launched its Golden Age of Science Accelerator, committing up to $50 million in cloud credits to support the expansion of the Genesis Mission. Classmethod signed a five-year collaboration to help Japanese enterprises adopt AI. Further, AWS expanded Kiro's reach in education through BINUS University in Indonesia. In November, AWS launched Semarak AI Malaysia, a national program bringing AI tools to government officers, students and local software companies. AWS also made its AI-powered security service, Continuum, generally available and agreed to acquire DuckLabs, the company behind DuckDB.
Steep Valuation and Competition in Cloud are Overhangs
From a valuation standpoint, AMZN stock appears overvalued, trading at a forward 12-month price/earnings ratio of 23.43X, higher than the industry's 20.33X. Amazon has a Value Score of D. The premium suggests that much of the near-term AI optimism is already priced in.
AMZN's Valuation Appears Steep
Image Source: Zacks Investment Research
Competitive pressure, however, remains a key watchpoint. Microsoft continues to leverage its enterprise software relationships to win AI workloads, while Alphabet is pairing its cloud platform with in-house AI models and chips. Nvidia, which also signed a new agreement with AWS, plays a dual role as a critical accelerator supplier and a provider of its own cloud services. As Microsoft and Alphabet accelerate data center buildouts and Nvidia deepens its AI computing presence, AWS must sustain innovation and capacity additions to defend market share. Competition, however, is intensifying. Microsoft’s Azure revenues surged 48% to $33.2 billion in the first quarter of fiscal 2027, while Alphabet’s Google Cloud revenues jumped 103% to $30.7 billion in third-quarter 2026, backed by a $561 billion backlog. Nvidia’s Data Center revenues soared 117% to $89 billion in second-quarter fiscal 2027. Although AWS remains the largest cloud platform, Microsoft and Alphabet are growing faster, while Nvidia, also an AWS partner, is ramping its Vera Rubin platform across rival clouds, including Google Cloud and Azure.
Q4 Guidance and Capex Temper AMZN’s Near-Term Visibility
For the fourth quarter of 2026, Amazon expects net sales between $240 billion and $247 billion, indicating 12-16% year-over-year growth, including an unfavorable foreign exchange impact of approximately 60 basis points. Operating income is projected between $28.5 billion and $33.5 billion compared with $25 billion in the year-ago quarter, while advertising revenues are expected to grow in the high teens. Management expects AWS revenue growth to exceed 40% in both 2027 and 2028, signaling robust long-term demand.
However, the investment burden is substantial. Amazon expects 2026 cash capital expenditures of approximately $220 billion, with third-quarter cash capex alone reaching $75.9 billion, primarily for AWS and AI infrastructure. Although trailing 12-month operating cash flow rose 29% to $168.3 billion, free cash flow swung to an outflow of $42.4 billion from an inflow of $14.8 billion a year earlier.
The Zacks Consensus Estimate for AMZN's 2026 earnings is pegged at $12.90 per share, indicating an 79.92% increase from the figure reported in 2025. This strong earnings trajectory supports the share price outlook. Investors should hold AMZN despite the premium because AWS' accelerating, highly profitable growth offers durable long-term earnings power.
Amazon.com, Inc. Price and Consensus
Amazon.com, Inc. price-consensus-chart | Amazon.com, Inc. Quote
Conclusion
Amazon's accelerating AWS growth, expanding AI adoption and record margins provide solid fundamental reasons to stay invested. However, elevated capex, negative free cash flow, intensifying cloud competition and a stretched valuation limit near-term upside. AMZN currently carries a Zacks Rank #3 (Hold), suggesting existing investors should hold the stock while new investors wait for a better entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.