Amazon’s Cloud Business Just Did Something It Hasn’t Done in Nearly Five Years

Investors have asked one big question about artificial intelligence (AI) over the past year: Will all of the spending pay off? Tech giants have poured hundreds of billions of dollars into data centers, chips, and power, and during the most recent earnings seasons, shareholders have started to look for proof that customer demand justifies the bill.

Amazon (NASDAQ:AMZN) just delivered some of the best evidence yet. In the third quarter, revenue growth at Amazon Web Services (AWS), the world's No. 1 cloud services provider, accelerated to its fastest pace in nearly five years. For a business that now generates more than $180 billion in annual revenue, that's a remarkable feat.

The stock didn't exactly celebrate, though. Amazon shares declined in the following trading session as investors focused on the company's enormous spending plans. So let's take a closer look at what AWS accomplished, what's behind it, and what it means for you as an investor.

Image source: Getty Images.

AWS and the AI build-out

First, a quick refresher on the AWS story. Amazon launched the unit back in 2006, and it was known for a variety of cloud services well before the AI boom. In fact, it's long been Amazon's main profit driver. With the arrival of AI, demand for computing capacity soared. Customers turn to AWS for everything from Nvidia's leading graphics processing units (GPUs) to Amazon's in-house chips, as well as large language models and agentic AI tools.

However, that demand has come at a price. Amazon lifted its 2026 capital spending forecast to $220 billion from $200 billion during the second-quarter report a few months ago, and chief Andy Jassy said even that wouldn't be enough to fully serve demand. Investors have worried about whether revenue would ever catch up with the spending, and now, the latest earnings report, for the third quarter, offers us some evidence.

AWS revenue climbed more than 39% year over year to $46 billion, for the fastest growth rate in nearly five years. The annual revenue run rate now stands at $184 billion. It's rare for a business this large to speed up rather than slow down.

Amazon's profit driver

On top of this, AWS scored a win when it came to profitability, with operating income advancing 55% to more than $17 billion. The unit accounts for about 60% of Amazon's operating income, showing how much the cloud business matters to the bottom line.

All of that is great, but what may be even more encouraging is the outlook, as this offers us a view of revenue to come. AWS has a contracted revenue backlog of $578 billion, for a triple-digit year-over-year gain. And usage of Amazon Bedrock, AWS’ AI inference service, is exploding higher, too, with Fortune 500 customers spending about seven times more than a year earlier. Jassy even said that AWS may become a trillion-dollar business within the coming five to 10 years.

In spite of all of this positive news, Amazon still faces a challenge, and it has to do with the spending levels. Spending is weighing on free cash flow today, and Amazon says it will continue to do so until the company can monetize its new data centers. Any potential slowdown in AI demand could lengthen this timeline, and this risk has prompted some investors to avoid Amazon stock as well as the shares of other cloud giants.

But here's some good news. The third-quarter numbers suggest the investment is meeting demand rather than chasing it. The evidence is faster growth, rising profits, and a strong backlog.

So, where does that leave investors? Amazon's cloud business is accelerating at a scale few companies have ever reached, and management expects the momentum to last through at least 2028. The stock could swing in the short term given the spending, but for long-term investors, Amazon looks like a great stock to own.

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