Brief Overview
Amazon.com Inc delivered third-quarter 2026 results broadly in line with expectations. Revenue grew 12 per cent year on year. Growth was softer because Prime Day shifted from its usual third-quarter timing to the second quarter this year, which pulled forward retail sales. Nine-month revenue and adjusted profit after tax and minority interests (PATMI) reached 70 per cent and 71 per cent, respectively, of Phillip Securities Research’s full-year 2026 forecasts. Amazon Web Services (AWS) accelerated for the sixth consecutive quarter, growing 39 per cent year on year — the fastest growth in 19 quarters — with backlog surging 189 per cent year on year. Amazon maintained its full-year 2026 capital expenditure guidance at US$220 billion but expects spending to increase meaningfully in financial year 2027.
Investment Positives
AI Adoption and Custom Silicon Accelerate AWS Growth
AWS revenue grew 39 per cent year on year to US$46 billion, its fastest growth in nearly five years, supported by both core cloud and artificial intelligence workloads. The backlog reached US$578 billion, up 189 per cent year on year. Amazon Bedrock continues to gain traction, with Fortune 500 customer spending increasing nearly seven times year on year and token volume surging nearly 17 times. Graviton and Trainium revenue commitments each increased more than 20 times year on year, while custom silicon helped customers save over US$2 billion in the third quarter alone. The analyst views custom silicon as a key competitive differentiator, enabling AWS to reduce reliance on third-party chip suppliers such as Nvidia and capture a greater share of the AI infrastructure value chain.
Margins Exceeded Expectations
Operating income surged 61 per cent year on year to US$28.1 billion, exceeding guidance of US$22.5 billion to US$26.5 billion. Operating margin reached a record 13.9 per cent, 160 basis points above expectations. AWS operating income grew approximately 56 per cent year on year to US$17.8 billion, with a 38.7 per cent margin. AI margins are improving rapidly, supported by cost efficiencies from proprietary silicon, higher infrastructure utilisation, and growing inference demand. Retail profitability also improved, supported by fulfilment efficiencies and lower cost-to-serve, despite higher fuel and transportation costs.
Strong Demand Visibility Justifies Aggressive Capital Expenditure
AWS backlog surged 189 per cent year on year to US$578 billion, with an average contract life of six years, providing strong long-term revenue visibility. Management expects AWS revenue growth to exceed 40 per cent in both the financial years 2027 and 2028, supported by customer commitments extending well into the financial year 2029. Full-year 2026 capital expenditure guidance remains at US$220 billion, but spending is expected to increase meaningfully in the financial year 2027. Elevated spending has weighed on trailing 2-month free cash flow, which deteriorated from US$14.8 billion to negative US$42.4 billion. Nevertheless, the ratio of backlog to annual capital expenditure improved from 1.9 times in the financial year 2025 to 2.6 times in the third quarter of 2026, suggesting contracted demand is growing faster than infrastructure investment. With newly deployed AI capacity being absorbed almost immediately, the analyst believes robust demand visibility supports elevated capital expenditure despite near-term free cash flow pressure.
Outlook
Amazon guided fourth-quarter 2026 revenue to be between US$240.0 billion and US$247.0 billion, representing 12.5 to 15.7 per cent year-on-year growth, along with an approximately 60 basis-point foreign exchange headwinds. Fourth-quarter 2026 operating income is expected to be between US$28.5 billion and US$33.5 billion, compared with US$25.0 billion in the fourth quarter of 2025. Capital expenditure in the financial year 2026 is expected to remain at US$220 billion, representing a 67 per cent year-on-year increase.
We view management’s projection of over 40 per cent AWS revenue growth in both the financial years 2027 and 2028 positively, particularly given its unusually long guidance horizon and visibility into customer commitments extending into the financial year 2029. While near-term free cash flow remains under pressure, strong demand visibility and improving infrastructure utilisation support the long-term investment case, with monetisation expected to accelerate as capacity comes online.
Recommendation and Target Price
We upgrade our recommendation from ACCUMULATE to BUY, with an increased target price of US$330, up from the previous US$320. The financial year 2027 revenue and adjusted PATMI estimates have been increased by 2 per cent and 3 per cent, respectively, to reflect strong AWS growth visibility, while the financial year 2027 capital expenditure estimate has been raised by 3 per cent. While aggressive capital expenditure creates free cash flow pressure, strong demand visibility supports sustained infrastructure investment, which we believe will strengthen Amazon’s market leadership and create significant barriers to entry for potential competitors over the long term.
Frequently Asked Questions
Q: What is Phillip Securities Research's recommendation and target price for Amazon?
A: The recommendation has been upgraded from ACCUMULATE to BUY, with an increased target price of US$330, up from US$320.
Q: How fast did AWS grow in the third quarter of 2026?
A: AWS revenue grew 39 per cent year on year to US$46 billion, the fastest growth in nearly five years and the sixth consecutive quarter of acceleration.
Q: What is the size of AWS's backlog?
A: The AWS backlog reached US$578 billion, surging 189 per cent year on year, with an average contract life of six years.
Q: How did operating margins perform?
A: Operating margin reached a record 13.9 per cent, 160 basis points above expectations, while operating income surged 61 per cent year on year to US$28.1 billion, exceeding the upper end of guidance.
Q: What is the outlook for AWS revenue growth?
A: Management expects AWS revenue growth to exceed 40 per cent in both the financial years 2027 and 2028, supported by customer commitments extending into the financial year 2029.
Q: How much is Amazon spending on capital expenditure?
A: Full-year 2026 capital expenditure guidance is US$220 billion, a 67 per cent year on year increase. Spending is expected to increase meaningfully in the financial year 2027.
Q: What is the impact on free cash flow?
A: Trailing 12-month free cash flow deteriorated from US$14.8 billion to negative US$42.4 billion owing to elevated capital expenditure on AI infrastructure.
Q: How is Amazon's custom silicon contributing to its AI strategy?
A: Custom silicon through Graviton and Trainium helped customers save over US$2 billion in the third quarter alone, with revenue commitments increasing more than 20 times year on year. The analyst views this as a key competitive differentiator that reduces reliance on third-party chip suppliers.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
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