Amazon (NSDQ:AMZN) US$200B AI Capex Bill, and Why AWS Still Wins

Amazon AI trade comes back, is it time to buy some stock

Amazon is continuing to see strong growth through AWS, which is helping offset concerns around the scale of its capex buildout. In our view, that matters because over the long term Amazon still looks attractive, especially with AWS backlog expected to move toward US$100B and revenue potentially exceeding US$100B by 2028.

A large part of Amazon’s capex program is being directed into the development of its own custom AI chips. The company now has four main chip stacks, and this is becoming a much more important part of the AWS story.

A New Decade of Amazon AI Infrastructure

Graviton is Amazon’s custom CPU family, built to deliver better price performance for general computing workloads, with management claiming around 40% better price performance than comparable CPUs. On the AI side, AWS launched its first-generation Trainium chip for training workloads in 2022.

The next step is Trainium3, which is built on a 3-nanometre process. Amazon says it is more than 4x faster than Trainium2, with 4x more memory and 40% better energy efficiency. That puts it at the leading edge of semiconductor manufacturing and shows how serious Amazon is about building out its own AI infrastructure stack.

We think Amazon’s investment in its chip stack should help the business reduce costs and improve operational flow, much like Google has done with its own custom chips.

At the same time, it should also help support further growth across the AWS customer base, which in turn should strengthen cash flow generation over the near term.

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Operating Leverage Confirmed, but the capex is a big bill

The market’s concern has been the scale of Amazon’s capex, with around US$200B now being deployed in a way that is starting to weigh on free cash flow. That has made investors more focused on competition and whether Amazon can actually generate strong returns on the capital it is putting to work.

A big part of that spend is going into Amazon’s custom chip buildout, which is clearly focused on performance per watt and building a lower-cost alternative to third-party chips. At the same time, its investment in businesses like Kiva and the broader rollout of robotics across warehouses is also helping the margin story by lowering operating costs.

Amazon was able to double its return on invested capital over the past two years, reaching around 15%. We do think FY26 could see some short-term pressure on ROIC because of how large this current buildout is, but over the longer term we think that investment should translate into stronger returns.

One of the standout performers in FY25 was the advertising segment, which reached US$68B. That matters because advertising and AWS are both highly profitable parts of the business and give Amazon stronger earnings support while the capex cycle remains elevated. The advertising segment reaching 100 billion over the next 3-4 years is definitely on the table.

We are also seeing the cost of goods sold grow more slowly at 9% than revenue at 12%, which is an encouraging sign. It suggests that even as the buildout continues, the cost base is not expanding at the same pace as revenue. That is an important trend to keep watching.

The investor’s takeaway for Amazon

With revenue backlog building, we believe AWS is likely to maintain its growth momentum, while advertising is also becoming a core profitability driver for the business.

In the near term, free cash flow is being pushed lower by the capex buildout. But if Amazon can keep overhead under control and continue converting that backlog into revenue, we think the stock is worth considering in a portfolio.

As capex eventually normalises, free cash flow margins should begin to recover. Invested capital grew by around 17% in FY25, rising from roughly US$360B to US$422B as the surge in capex pushed property, plant, and equipment sharply higher. But NOPAT grew faster, by about 22%, which shows real operating leverage at scale.

That said, we do think there could be a dip in returns this year as the current investment cycle flows through.