Amazon Spent More on Data Centers Last Quarter Than AWS Earned in Revenue. Should Investors Worry?

Amazon (NASDAQ:AMZN) has proven itself to be one of the early winners of the artificial intelligence (AI) boom, and this is thanks to its cloud computing business. Amazon Web Services (AWS) is a hub for anything AI, offering the chips and systems needed to power AI workloads. And thanks to this, AWS' revenue has soared, reaching a $169 billion annual run rate in the second quarter.

But the report also shows us another trend that might not please investors. And that's the fact that the company spent more on data centers in the period than AWS earned in revenue. Does this spell trouble for the AI giant? Let's find out.

Image source: Getty Images.

The Amazon story so far

First, a quick catch-up on Amazon's AI story so far. AWS, the company's biggest profit driver, is the world's No. 1 cloud services provider, and as such, attracts a considerable amount of AI business. Customers that already use AWS for non-AI services find it easy to broaden into AI services here rather than turn to another cloud company.

As a result, AWS' revenue has taken off, and the second quarter illustrates this. In that period, the unit generated about $42 billion in revenue, up 36% year over year, and $16 billion in operating income. At the same time, though, Amazon's cash capital expenditures totaled just over $53 billion. The company says that investment "primarily relates to AWS and generative AI."

That puts capex at about $10 billion above AWS quarterly revenue and more than three times its operating income. Though this figure refers to the whole company, most of the spending is flowing toward AI and cloud capacity. And the pace of investment isn't slowing. Amazon lifted its 2026 capex forecast by $20 billion to about $220 billion.

Why Amazon says it's spending now

Management's argument is that demand exists right now -- this isn't about possibilities down the road. AWS' backlog, or contracted future revenue, has reached $496 billion and is growing at a triple-digit rate. Even at the above capex level, Amazon still won't be able to meet 2026 demand, says chief Andy Jassy, and he expects the same in 2027. On top of this, he calls demand already in place for 2028 "striking."

Building to support such demand doesn't result in monetization overnight. The company invests in data centers about two years before servers can start bringing in revenue, but the good news is Amazon can use those facilities for more than 30 years. Servers and networking gear generate growth faster: The company buys them a few months before they're set to work, and they generally break even in less than three years.

Meanwhile, Amazon will face pressure on free cash flow until the new data centers open their doors and the servers inside them have been running for a few years, according to Jassy.

Does this signal trouble?

So, does spending that outpaces revenue signal trouble? Not necessarily. Amazon is highly profitable with a long track record of earnings growth and experience in investing in technology that will deliver over time: the creation of AWS is a clear example of this. And Amazon says it buys servers only when customer demand is there, which is different from spending based on hope.

Still, this is a bet on timing, and investors must be comfortable with that. Amazon has to build before it can earn, so investors should expect free cash flow to remain under pressure during this time. AWS' backlog gives the bet a solid foundation, and now the thing to watch is whether the unit's revenue keeps accelerating alongside capex. From what we've seen so far, though, Amazon is well positioned to deliver, making it a fantastic AI stock to buy and hold.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.