Amazon profits surge on AI demand, but capital spending crushes free cash flow

Amazon reported record operating income and margins for the first quarter of 2026, driven by a 28% year-on-year surge in cloud computing revenue and growth in advertising and retail operations. However, capital expenditure rose sharply to $44.2 billion in the quarter, with full-year guidance set at $200 billion, significantly reducing free cash flow. The company attributes the cloud growth to increased demand for artificial intelligence computing power.

Amazon Web Services revenue grew 28% year over year in the first quarter of 2026 to $37.6 billion, accelerating from 24% in the fourth quarter of 2025 and 20% in the third. Chief Executive Officer Andy Jassy noted during the earnings call that it is unusual for a business to grow this fast on a base of this size. Much of this reacceleration is traced to artificial intelligence, with companies training and running models renting enormous amounts of computing power.

Amazon is increasingly supplying this power with its own custom silicon, including Graviton, Trainium, and Nitro, which now generate more than $20 billion in annual revenue run rate. The demand is evident in Amazon’s commitments, with AWS remaining performance obligations swelling to $364 billion. The company recently expanded a cloud agreement with OpenAI, underscoring the scale of demand for its infrastructure.

Other business segments also contributed to the record results. Amazon’s advertising revenue rose 24% in the first quarter to $17.2 billion, while North America operating income jumped to $8.3 billion from $5.8 billion a year earlier. The number of items sold across stores grew 15% year over year, the quickest pace since the pandemic-era surge. Together, these gains lifted Amazon’s operating margin to a record 13.1%, with operating income rising 30%.

The cost of maintaining this growth trajectory has been substantial. Amazon spent $44.2 billion on property and equipment in the first quarter alone, up from $25 billion a year earlier. This outlay has nearly erased the company’s free cash flow, which fell to about $1.2 billion over the past 12 months from close to $26 billion in the year-ago period. Management expects roughly $200 billion in capital expenditures across 2026, much of it directed toward data centres and artificial intelligence chips.

Amazon shares slipped more than 3% on Friday, contributing to a pullback where shares were down more than 9% over the past five trading days. The stock trades at about 32 times earnings, or mid-30s excluding gains from its Anthropic investment. While the valuation is not cheap, the company’s ability to grow operating profit by 30% annually has kept investor interest high despite the heavy spending requirements.

The Motley Fool’s Stock Advisor team did not include Amazon in their current list of 10 best stocks to buy. The analysts suggest that while the business is growing, the risk remains that the artificial intelligence build-out proves costlier or slower to pay off than management expects. For long-term investors, the recommendation is to keep positions measured and judge the stock over years rather than quarters.