Amazon (NASDAQ: AMZN) delivered a quarter that was simultaneously its strongest in years and its most capital-intensive. Revenue rose 20% to $200.6B, topping the $196.8B consensus. Operating income surged 43% to $27.5B. That headline EPS of $5.75 — more than three times the $1.82 estimate — included a $53.4B pre-tax non-operating gain from the Anthropic investment. Strip that out, and operating earnings tell a cleaner, though still impressive, story.
The real engine was AWS. Segment revenue accelerated to 37% year-over-year growth, its fastest clip in 18 quarters, reaching a $169B annualized run rate. AWS operating income jumped 64% to $16.6B, and its margin expanded to 39.4% from 32.9% a year ago. Management disclosed that both the AI and chips businesses each exceeded $25B annual run rates, growing triple digits. This isn't just a cloud recovery. It's a structural re-acceleration driven by enterprise AI workloads migrating to production.
North America segment sales rose 16% to $116.2B, with operating income up 21% to $9.1B. International improved modestly, with operating income of $1.7B on $42.2B in revenue. Advertising services grew 26% to $19.8B, maintaining momentum as a high-margin revenue stream. The retail side is executing well; Prime delivery speeds improved, with over 40% more items delivered same-day or overnight in the first half. But the margin story remains anchored to AWS.
Here's the tension. Free cash flow turned negative to a $7.6B outflow over the trailing twelve months, compared to a $18.2B inflow a year ago. The culprit: a $66.1B year-over-year increase in capex, primarily for AI infrastructure. Operating cash flow grew 33% to $161.4B, but capital spending is consuming it faster than it's being generated. This is a deliberate choice. Amazon is building data center capacity at a pace few competitors can match. It also means free cash flow will remain under pressure until those investments start generating returns at scale.
Q3 guidance implies net sales of $197B to $202B, or 9% to 12% growth, with operating income of $22.5B to $26.5B. Management noted that excluding Prime Day's timing shift, year-over-year growth would be nearly 400 basis points higher. The operating income midpoint of $24.5B would represent 41% growth from last year's $17.4B — a strong signal that margin expansion is continuing even as capex ramps.
The $53.4B Anthropic gain is a one-time event, but it highlights a broader strategic point: Amazon's investment portfolio is becoming a material source of non-operating income. The company now carries $284B in other assets on its balance sheet, up from $123B at year-end. That's a lot of optionality. It also introduces volatility into reported net income that investors need to look through.
What to watch next: whether AWS's 37% growth rate is sustainable as the base expands, and whether the capex cycle peaks in the second half of 2026 or extends into 2027. Amazon is betting that AI infrastructure spending will be self-funding through AWS revenue growth. So far, the operating income trajectory supports that thesis. But free cash flow won't turn positive until the pace of investment moderates or the returns accelerate. This quarter's print suggests the latter is happening. Just not fast enough to offset the former.