Is Amazon Stock a Buy After CEO Andy Jassy's $1 Trillion AWS Revenue Prediction?

Amazon (NASDAQ: AMZN) shares surged after a strong second-quarter earnings report. What likely really grabbed investors' attention was CEO Andy Jassy predicting that its cloud computing unit, Amazon Web Services (AWS), could become a $1 trillion revenue business. Jassy is not known for his bold predictions, unlike Elon Musk, so this likely carried more weight with investors.

Cloud growth keeps accelerating

The highlight of Amazon's quarter was once again AWS, with revenue surging 37% year over year to $42.2 billion. That was an acceleration from the 28% growth it saw in the first quarter and the 24% growth it saw in the fourth quarter. It was AWS' fastest revenue growth in nearly four and a half years (18 quarters).

Jassy said that both its artificial intelligence (AI) and chip businesses now had more than $25 billion revenue run rates, with its AI business growing by triple digits. Its backlog also grew by triple digits to $496 billion.

Operating income in the segment, meanwhile, jumped 63% to $16.6 billion. Its operating margin of 39% has now risen for four straight quarters, helped by use of its custom chips and investments in software and optimization. While Jassy said margins could fluctuate, he also said the steady rise hasn't been random.

Amazon's e-commerce operation, meanwhile, continues to perform well. Its North America sales jumped by 16% year over year to $116.2 billion, while international sales rose 15% to $42.2 billion. Advertising continues to be a big driver, with ad revenue climbing 26% to $19.8 billion, fueled by its sponsored ad business.

The company once again saw nice operating leverage in its North American e-commerce operations, with its operating income for its North American segment jumping 21% to $9.1 billion. Its international segment saw operating income rise 15% to $1.7 billion.

Overall, Amazon's revenue jumped by 20% year over year to $200.61 billion, which easily topped the $196.47 billion analyst consensus, as compiled by LSEG. Earnings per share (EPS) more than tripled to $2.78, but they included a large gain from Amazon's investment in Anthropic, so they were not comparable to analyst estimates for EPS of $1.82.

Looking ahead, Amazon projected that its third-quarter revenue would climb to between $197 billion and $202 billion (representing growth of between 9% and 12%), which was below the $204.1 billion consensus. Adjusted for the shift in Prime Day, growth would be between 13% and 16%. Currency is expected to be an 80-basis-point drag.

Jassy also said Amazon would increase its capex budget this year, taking it from $200 billion to $220 billion, largely due to higher memory costs. He said AWS demand continues to outstrip capacity and that this will continue in 2027, while adding that "the demand we already have for 2028 is striking." Jassy topped it off by saying he sees AWS becoming a $1 trillion business in time, with strong ROIC (return on invested capital) and free cash flow.

He also went over some basic economics of the cloud business, noting that AWS should break even on its server and networking investments in two to three years, while its servers have useful lives of five to six years and it signs five-year leases. The company's data centers, meanwhile, have over 30-year useful lives, and the economics become stronger over time as Amazon doesn't have to make these upfront data center investments.

Image source: Getty Images.

Is the stock still a buy?

Jassy has long been derided given the underperformance of Amazon's stock, despite the strong job he's done positioning both the company's e-commerce and cloud computing businesses. However, I think the vision he laid out for AWS becoming a $1 trillion revenue business and simply explaining AWS' economics really struck a chord with investors.

Even after the jump in its stock price, Amazon still trades at an attractive valuation, with a forward price-to-earnings ratio of about 31 times 2026 analyst estimates and 27 times 2027 estimates. That's still a historically low valuation for the stock and well below its retail peers Walmart and Costco. With its e-commerce business humming along and AWS gaining strong momentum, the stock still looks like a long-term buy at these levels.

Geoffrey Seiler has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.