Prediction: Amazon Stock Will Soar After Oct. 29

It's nearly Amazon's (NASDAQ: AMZN) turn to step up to the earnings podium. The e-commerce and cloud computing mega-giant is scheduled to report third-quarter earnings on Oct. 29, and I think investors have plenty of reasons to be optimistic.

Amazon spent much of 2026 defending its massive investments in artificial intelligence (AI) infrastructure, with capital expenditures expected to reach approximately $220 billion this year. That's an enormous amount of money, even for a company of Amazon's size.

However, the market isn't necessarily impressed by big spending announcements anymore. I've argued that Wall Street is in the "show-me" phase of AI, where investors want evidence that those investments are generating meaningful returns.

Image source: Amazon.

Amazon delivered some of that evidence in July, when its cloud computing business reported outstanding growth and Amazon stock jumped 12% in a single day. If that momentum continues into Q3, I think Amazon stock could soar once again following its upcoming earnings report.

Amazon is giving Wall Street what it wants

Amazon Web Services (AWS) is unquestionably the company's most important generator of profits, even though its online retail operations account for a much larger share of revenue. AWS revenue increased 37% from a year ago to $42.2 billion in the second quarter, its fastest growth in 18 quarters. Operating income jumped to $16.6 billion from $10.2 billion a year earlier.

That's particularly impressive when compared with Amazon's retail operations. Its North America segment generated $116.2 billion in revenue, but only $9.1 billion in operating income.

AWS also reported an annualized revenue run rate exceeding $25 billion for its AI business, while its custom chips business, which includes the Trainium AI processor, reached a similar annualized pace.

Those figures demonstrate that Amazon is doing more than building expensive data centers and hoping customers eventually show up. Companies are already paying for the computing capacity and AI services that AWS provides.

The demand isn't limited to one customer or application. Amazon has announced agreements involving companies such as OpenAI, Anthropic, Pinterest, and Uber Technologies.

That's the kind of evidence investors should be looking for during the show-me phase of AI.

Anthropic gives Amazon another advantage

Amazon's relationship with Anthropic, the developer of the Claude family of AI models, provides another interesting opportunity.

Amazon has invested $13 billion in Anthropic, and the companies have an extensive cloud computing relationship. Anthropic uses AWS infrastructure and Amazon's custom AI chips to support its growing computing requirements.

That arrangement gives Amazon two potential ways to benefit from Anthropic's expansion. First, AWS can generate revenue by supplying computing capacity to Anthropic. Second, Amazon could benefit from an appreciation in the value of its investment in the AI company.

In fact, Amazon's Q2 results included $53.4 billion in non-operating pretax income, primarily attributable to its Anthropic investment. That's an impressive gain, but there's an important distinction. Investment-related accounting gains aren't the same as recurring profits generated by AWS operations.

For that reason, I'll be paying much closer attention to AWS revenue and operating income than to any additional gains associated with Anthropic's valuation. Amazon doesn't need another enormous paper gain to demonstrate that its AI strategy is working. Continued growth in its cloud business would be much more meaningful.

The $220 billion question

Amazon's spending comes with a substantial financial cost. It reported negative free cash flow of $7.6 billion for the 12 months ending June 30, compared with positive free cash flow of $18.2 billion during the preceding 12-month period.

Amazon attributed much of that deterioration to increased spending on property and equipment, primarily related to AI investments.

I think there's a huge difference between spending aggressively without meaningful customer demand and spending aggressively while your most profitable business is expanding at its fastest pace in years. Amazon appears to be in the latter category.

The Q3 report should provide another opportunity to evaluate that argument. Investors will want to see continued AWS revenue growth, healthy operating income, and evidence that demand for AI computing remains strong.

Another strong AWS quarter could go a long way toward addressing those concerns -- and provide the catalyst for a substantial post-earnings rally that I think Amazon will deliver after Oct. 29.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Pinterest. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.