Amazon (NASDAQ:AMZN) is set to report its second-quarter earnings after the market close on Thursday, with analysts closely watching Amazon Web Services (AWS) margins amid a massive capital expenditure plan. Initial consensus estimates from Visible Alpha, released by S&P Global (NYSE:SPGI), project AWS revenue of $40.5 billion, representing a 31.2% year-over-year increase. However, the operating margin is expected to contract to 33.8%, down 390 basis points from the first quarter's 37.7%.
Sequential Profit Decline
The margin compression translates to an estimated AWS operating income of $13.7 billion, roughly 3.3% lower than the $14.2 billion recorded in Q1 2026. This sequential decline underscores a critical challenge for the e-commerce and cloud giant: while top-line cloud growth remains robust, profitability is under pressure from rising costs, including depreciation, energy, and custom chip investments. AWS accounts for about 62% of Amazon's total operating income, making its margin performance a key driver of overall earnings.
Capital Expenditure Overhang
Amazon's aggressive spending plans add to investor concerns. The company projects capital expenditures of approximately $200 billion for 2026, driven by data center expansion, AI infrastructure, and new initiatives like Project Kuiper's satellite broadband network. On Monday, Amazon's Project Kuiper submitted an application to deploy up to 5,105 direct-to-phone satellites, adding another capital-intensive venture. Free cash flow has already plunged 95% year-over-year to $1.2 billion, despite operating cash flow rising 30% to $148.5 billion, due to an extra $59.3 billion in property and equipment spending.
Market Context and Valuation
Amazon's shares closed Monday at $231.39, down 0.3%. Morningstar (NASDAQ:MORN) analyst Dan Romanoff assigns a fair value of $280, implying about 21% upside, citing AWS growth, backlog, and capacity expansion as core drivers. A more bullish projection from a 24/7 Wall St. column distributed by Yahoo suggests a long-term price target of $400, though this is not official guidance and relies on expectations of substantially higher future earnings and sustained valuation multiples. The average analyst target stands at $312.87, per the column.
Analyst Caution and Risks
Seeking Alpha contributor Given Mahlangu recently lowered his rating on Amazon to Buy, citing increased cash burn, higher leverage, and investments in AI and Amazon Leo. Key risks include AWS margins falling below projections due to rising depreciation, energy, and chip costs; a potential upward revision in capital expenditures further straining cash flow; and a slowdown in third-quarter cloud revenue that could offset any positive earnings surprise. A bullish scenario would require accelerated AWS growth alongside stable margins, as robust sales with additional spending may no longer satisfy investors.
Earnings Guidance
Amazon expects second-quarter group revenue between $194 billion and $199 billion, with operating income ranging from $20 billion to $24 billion. The midpoint implies group operating income of $22 billion, down 7.9% from Q1's $23.9 billion. CEO Andy Jassy has highlighted AWS's 28% growth rate as the fastest in 15 quarters, and the custom-chip segment has surpassed a $20 billion annual revenue run rate. However, the $200 billion capex plan and margin compression remain focal points for investors assessing Amazon's near-term earnings trajectory.
