Amazon's Investment in AWS Fuels Future Growth

Amazon's investment in AWS has fueled its future growth. The company's $195 billion backlog (+25% YoY) and $123 billion revenue demonstrate its success in cloud computing. Amazon's investment-intensive strategy is a long-term bet on its growth engine, outperforming the broader market with a 14% increase since the last coverage.

Amazon's (NASDAQ:AMZN) investment in its cloud computing division, AWS, has significantly contributed to the company's future growth. The company's $195 billion backlog (+25% YoY) and $123 billion revenue run rate underscore its success in the cloud computing sector. Amazon's investment-intensive strategy is a long-term bet on its growth engine, outperforming the broader market with a 14% increase since the last coverage.

AWS stands as a main driver of Amazon's long-term stock growth. In Q2-FY25, AWS derived $30.9 billion in revenue with a 17.5% YoY increase and an annualized run rate of $123 billion, outpacing Amazon's overall topline growth of 10.87%. This growth is underpinned by AWS's high-margin, high-growth segment, which is based on its market leadership and integration of AI.

The cloud computing division's continued growth is based on its market leadership and integration of AI. AI-based revenue is experiencing triple-digit YoY growth. Focusing on the future topline, AWS’s $195 billion backlog is up 25% YoY, signaling solid revenue growth potential based on strong demand from enterprises. Amazon's earnings Q2 saw the division secure new agreements with major clients like PepsiCo (PEP), Airbnb (ABNB), Peloton (PTON), and NASDAQ (NDAQ), pointing to the demand across industries.

AWS's operational effectiveness is a major pusher of Amazon's growth potential. Despite a Q2 margin dip to 32.9% from Q1’s 39.5% due to seasonal stock-based compensation and higher depreciation, AWS delivered $10.2 billion in operating income. The segment maintains high margins while investing heavily in infrastructure, with $31.4 billion in Q2 CapEx reflecting Amazon’s strategic focus on scaling capacity to capture the demand.

Amazon's aggressive investment in AWS infrastructure, custom silicon, and data centers has strained its free cash flow (FCF), declining to $18.2 billion for the trailing 12 months from $53 billion a year prior (down 66%). However, this investment is a strategic requirement to address supply constraints and for long-term market lead. The current supply constraints indicate that without these investments, AWS risks ceding market share to competitors like Microsoft Azure and Google's GCP.

Beyond AWS, Amazon's CapEx also supports retail growth through investments in same-day delivery facilities, robotics, and automation. Amazon's Q2-FY25 had a 40% increase in direct lane orders with a 12% reduction in package travel distance and a 15% decrease in handling touches per unit, driving a record 30% increase in same-day/next-day deliveries.

In conclusion, Amazon's intense capital expenditures are straining near-term cash flow, but it's a long-term strategy for securing AWS leadership in cloud and AI. With its $195B backlog, triple-digit growth from AI, and broadening retail efficiencies, Amazon is creating a moat that competitors can't match, which will yield long-term outsized returns ahead of short-term pain.

References:
[1] https://seekingalpha.com/article/4817086-aws-backlog-fuels-amazon-future