Earnings for the September quarter were a dampener for “Magnificent Seven” stocks, and all of the companies that have reported so far fell after their confessionals. The artificial intelligence (AI) trade has shown signs of cracking amid growing angst over the burgeoning capex bill.
Once known for their fat free cash flows, hyperscalers are now burning cash and have had to look at capital raises to fund the deficit. For instance, Amazon (AMZN) — which expects to spend $220 billion on capex in 2026 and “meaningfully more” next year — has reported negative free cash flows for two consecutive quarters. In the trailing 12 months, the company saw a cash outflow of $42.4 billion versus positive free cash flow of $14.8 billion in the corresponding period ending Sept. 30, 2025.
But that doesn't mean things are all bad for AMZN stock. Let's take a closer look.
Amazon Is the Second-Best Mag 7 Stock This Year
Even though AMZN stock fell after reporting third-quarter earnings, shares have since recouped those losses. Amazon stock has now extended its year-to-date (YTD) gain to more than 15%, which makes it the second-best performing Mag 7 stock this year after Apple (AAPL). For context, of the remaining constituents, only Microsoft (MSFT) is in the green this year; the others, including Nvidia (NVDA), are in the red on a YTD basis.
In a pre-earnings analysis, I noted the possibility of a post-earnings rally for Amazon stock unless the company came up with dud numbers. However, Amazon’s Q3 earnings report was a dampener, and it missed on both the top and bottom lines. Looking at different segments, Amazon’s ad revenues trailed estimates while the e-commerce segment continued to battle tepid consumer spending. Amazon’s e-commerce sales were negatively impacted by its decision to pull forward Prime Day from July to Q2 in some countries in a bid to avoid conflict with the FIFA World Cup, but the growth was subpar even after accounting for the base effect.
Amazon Expects AWS to Become a $1 Trillion Revenue Business
The midpoint of Amazon’s Q4 revenue guidance also fell short of estimates, but as has been the case with fellow cloud companies, Amazon Web Services (AWS) was a bright spot. AWS revenue rose more than 39% year-over-year (YOY) in Q3, the highest growth in nearly five years, while AWS operating income jumped 56% YOY to $17.8 billion. Amazon’s cloud backlog also rose triple digits to $578 billion, which management stressed is diversified.
The company guided AWS revenue growth of more than 40% in both 2027 and 2028. The AWS business is running at an annualized revenue run rate (ARR) of $184 billion, and Amazon expects it to hit $1 trillion over the next five to 10 years.
Key Growth Drivers for AMZN Stock
Amazon’s custom chip business also grew triple digits in Q3, with revenue commitments for both Graviton and Trainium rising over 20 times in the quarter. Third-party chip sales could be a key growth driver for Amazon in the coming years.
Groceries are another growth driver for Amazon. In Q3, growth in groceries and everyday essentials was almost three times the rest of its store. The company is expanding its Amazon Now quick delivery service as well, and has brought the service to more than 450 cities and towns around the world. Amazon Pharmacy is another business where the company has just about scratched the surface, and so is its business-to-business (B2B) platform.
That said, there are a couple of risks investors should watch out for. Of course, the first is the company's burgeoning capex that continues to climb and eat into Amazon's once formidable free cash flows. There are also legitimate concerns about agentic AI negatively impacting Amazon’s lucrative digital advertising business. Furthermore, while cloud companies like Amazon are witnessing stellar growth, some of that is being driven by circular financing — a phenomenon where cloud companies invest in AI startups which then use those funds to purchase services from them.
All told, I bought the dip in Amazon earlier this year and continue to remain bullish on AMZN stock, expecting it to rise toward $300 over the next six months. Amazon's valuation is quite reasonable, and the stock trades at about 24.7 times expected fiscal 2027 EPS. I believe markets have been a bit harsh on AMZN stock — which is up roughly 47% over the last five years, trailing the S&P 500 Index ($SPX) — and investors have been overlooking the AI-driven growth story. Amazon is among the best AI plays, even as that story now faces a serious reality check.
On the date of publication, Mohit Oberoi had a position in: AMZN , MSFT , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.