Amazon stock rose 3.9 percent Thursday, closing at $235.50, following its latest earnings report. The company's Amazon Web Services cloud computing division delivered strong revenue growth and expanding profitability—providing a clear catalyst that overshadowed a disappointing forward outlook and a turn to negative free cash flow for the quarter.
AWS posted double-digit revenue growth that surpassed consensus estimates by a material margin. The cloud segment's operating profit expanded significantly, contributing the vast majority of Amazon's overall earnings. That consistent performance validates AWS's market position and pricing power as enterprises deepen their AI adoption. We view AWS as the primary value driver for Amazon.
The company's forward guidance tempered some enthusiasm, projecting slower growth in its retail and advertising segments for the upcoming quarter. The shift to negative free cash flow drew particular scrutiny from analysts, pointing to higher capital expenditures for AI infrastructure and data centers—and raising questions about near-term reinvestment capacity.
The negative free cash flow reflects necessary investment to maintain AWS's competitive edge against Microsoft Azure and Google Cloud. Microsoft's stock rose 15.5 percent Thursday to $451.10, partly on strong cloud demand. Amazon's capital spending targets the AI-driven workloads that represent its most critical long-term growth opportunity.
We view Amazon's current valuation as compelling. AWS's performance provides a clear floor for the stock, and its dominance in cloud computing is a durable advantage. We maintain our Buy rating with a price target of $285, anticipating a return to positive free cash flow in the second half of the year as these investments begin generating returns.
Amazon is scheduled to report third-quarter earnings Oct. 24, when investors will look for clarity on capital expenditure plans and a timeline for returning to positive free cash flow.
