Amazon’s Free Cash Flow Swung $26 Billion in the Wrong Direction. The Stock Rose 15% Anyway.
Amazon (AMZN +15.32%) reported its second-quarter results on Thursday afternoon, and the release carried a figure that can scare investors off: Free cash flow for the trailing 12 months came in at an outflow of $7.6 billion. A year earlier, that figure was an inflow of $18.2 billion.
The market barely blinked. Shares of the e-commerce and cloud computing giant closed up about 15% Friday, at around $271 — near the top of their 52-week range.
So investors watched a company report negative free cash flow and bid the stock up double digits. I don’t think they’re wrong.
The same cash flow statement that shows the burn also shows that the operations funding it have rarely looked stronger. And the segment the money is flowing into is accelerating.
Image source: The Motley Fool.
Where the cash went
The burn isn’t coming from the business. Amazon’s operating cash flow rose 33% year over year to $161.4 billion for the trailing 12 months.
What changed is the spending. Purchases of property and equipment, net of proceeds, totaled $169 billion over the same period, up 64% year over year. In the second quarter alone, capital spending reached $54.2 billion, compared with $32.2 billion in the year-ago quarter.
The company said in its earnings release that the increase mostly reflects its investments in artificial intelligence (AI).
And the plan is getting bigger. CEO Andy Jassy said on the earnings call that the company now expects about $220 billion of capital spending in 2026, up from the roughly $200 billion it projected earlier in the year, pointing to rising memory costs.
And the trend has been building for a while. Amazon’s trailing-12-month free cash flow has now declined for six straight quarters, stepping down from a peak above $38 billion in late 2024 to this week’s negative figure. Operating cash flow grew year over year in every one of those quarters. In other words, the business kept producing more cash, and the build-out simply grew faster.
Importantly, the spending isn’t happening at a struggling company. Net sales rose 20% year over year to $200.6 billion in the second quarter, up from 13% growth in the year-ago period. The growth was broad, too. North America sales rose 16%, international sales rose 15%, and Amazon Web Services (AWS) revenue jumped 37%.
What the spending is building
AWS is where the payoff shows up most visibly. The cloud computing segment’s 37% year-over-year growth, to $42.2 billion, was its fastest in 18 quarters and its fifth straight quarter of acceleration, up from 17% growth in the year-ago period.
Jassy said in the release that “AWS is booming,” noting that the company’s AI and chips businesses “each eclipsed run rates of more than $25 billion.”
The growth is getting more profitable, too. AWS operating income rose about 64% year over year to $16.6 billion, and the segment’s operating margin expanded to 39.4% from 32.9% a year ago. AWS produced about 21% of Amazon’s net sales in the quarter but roughly 60% of its $27.5 billion in total operating income, which itself grew 43%. That mix is why I think the market was willing to look straight past the cash flow line.
However, investors shouldn’t read too much into Amazon’s reported net income of $62.6 billion, or $5.75 per share. That figure includes $53.4 billion of non-operating income, primarily from the company’s investments in AI company Anthropic.
It’s a markup on an investment, not cash from selling things. The profit engine to watch is operating income.
Today’s Change
(15.32%) $36.08
Current Price
$271.58
Key Data Points
Market Cap
Day’s Range
$262.01 – $273.23
52wk Range
$196.00 – $278.56
Volume
129.1M
Avg Vol
48.2M
Gross Margin
50.60%
At about $271, the stock trades at about 27 times forward earnings estimates. For a company growing revenue 20% year over year with operating income up 43%, that’s arguably a reasonable price — not cheap, but far from egregious.
Sure, guidance implies slower growth in the third quarter, with net sales of $197 billion to $202 billion, up 9% to 12% year over year. But the company said the timing of Prime Day shaved nearly 4 percentage points off that comparison. And its operating income guidance of $22.5 billion to $26.5 billion compares with $17.4 billion a year earlier.
Ultimately, the market is paying for AWS, and AWS keeps earning it. I like the stock, even after a double-digit pop.
Of course, the math can turn. If AWS’s acceleration stalls while capital spending keeps climbing, the negative free cash flow could start to matter a lot more, and I’d rethink my position. The spending may also stay elevated longer than investors expect. But those are risks to watch, not reasons to sell.
