Wall Street reviews Amazon's earnings report: $200 billion in capital expenditures are too intimidating and will put pressure on profits

Amazon AWS drives Q4 performance beyond expectations, but weak Q1 operating profit guidance combined with a planned capital expenditure of up to $200 billion in 2026 are shifting market focus from growth to profitability and the sustainability of free cash flow.

The company’s net sales in Q4 reached $213.4 billion, up 14% year-over-year, with GAAP operating profit of $25 billion. AWS revenue was $35.6 billion, up 24%, marking the fastest growth in 13 quarters and becoming the key variable behind the season’s outperformance.

However, management’s outlook for operating profit in Q1 2026 is significantly below market expectations: guidance ranges from $16.5 billion to $21.5 billion, with a median of $19 billion, compared to market expectations of about $22.5 billion. The company stated that this guidance includes approximately $1 billion of increased costs related to Amazon Leo and accounts for ongoing investments in e-commerce and international operations.

What also makes Wall Street more sensitive is the capital expenditure path. The company’s outlook for capital spending in 2026 is about $200 billion, far above the previous market expectation of approximately $146-149 billion. Analysts believe that above-expected investments will temporarily suppress profit margins and cash flow performance, but AWS demand and order commitments still support medium- to long-term growth.

AWS accelerates growth again, margins stabilize but face year-over-year pressure

According to HSBC, Amazon’s adjusted operating profit in Q4 was $27.4 billion, up 29.2% year-over-year, about 10% higher than market expectations, mainly driven by AWS. AWS’s Q4 sales were $35.6 billion, up 23.7%, about 2.2% above market expectations.

On the profit side, AWS’s GAAP operating profit in Q4 was $12.5 billion, up 17.6%, with an operating margin of 35.1%, down 180 basis points from the same period last year but up 30 basis points from Q3. HSBC noted that AWS’s chip business achieved triple-digit growth, with annualized revenue related to Trainium and Graviton exceeding $10 billion. UBS also pointed out that Trainium2 chips are “completely booked,” with about 1.4 million units deployed.

Weak Q1 operating profit guidance, Leo costs and investments lower expectations

The company expects Q1 net sales of $173.5 billion to $178.5 billion, up 11% to 15%, with a median of $176 billion, roughly in line with market expectations. The company stated that this guidance assumes about 180 basis points of favorable exchange rate impact.

However, the operating profit guidance is significantly below. The $16.5 billion to $21.5 billion range, with a median of $19 billion, is about 15% below the market consensus of $22.1-22.5 billion. HSBC, UBS, and Citi analysts’ expectations are $22.5 billion, $23.1 billion, and $22.1 billion, respectively.

The company explained that the Q1 operating profit guidance includes about $1 billion of incremental costs related to the Amazon Leo satellite project and investments in fast-growing commerce and international storefronts (including lower prices). Citi analysts said the guidance also reflects the costs of pursuing more aggressive pricing strategies in international markets.

HSBC emphasized that Amazon has historically been conservative in its guidance, with GAAP operating profits in the past 12 quarters consistently exceeding the upper end of guidance, so “disappointing guidance” still leaves room for upside surprises later.

$200 billion capital expenditure in 2026: expanding AWS while squeezing cash flow

The rise in capital expenditure is already reflected in cash flow. HSBC data shows free cash flow in Q4 was $15 billion, negatively impacted by higher capital spending; capital expenditures for that quarter were $39.5 billion.

For 2026, the company expects capital spending to reach $200 billion, a 52% increase year-over-year, and 34% above market expectations. This is mainly driven by growth in AWS and AI demand, as well as investments in computing capacity, with AWS order commitments growing 40% YoY to $240 billion. HSBC estimates that AWS will add about 7 to 8 GW of computing capacity by the end of FY2027.

For investors, the key is the return on capital expenditures: short-term depreciation and operating costs may suppress margins and GAAP EPS, but if AWS demand and order fulfillment proceed smoothly, the investments could translate into scale and efficiency advantages in the medium term.

Mixed analyst views: HSBC cuts target price, Citi maintains valuation premium

While most recognize AWS’s accelerated performance in Q4, analysts have adjusted their views on “high investments, low guidance” in terms of profitability and valuation.

According to HSBC, due to Q1 guidance and Leo costs, they have lowered their 2026-2027 GAAP EPS forecasts by about 11%, and reduced the target price from $300 to $280, maintaining a Buy rating. Based on the February 5 closing price of $222.69, the target implies about 25.7% upside.

UBS also maintains a Buy rating with a target price of $311, about 40% upside. They believe that “weak Q1 operating profit guidance and higher capital expenditures” will put pressure on the stock.

Citi argues that AWS’s accelerating growth, order trends, and retail efficiency improvements support a valuation premium for Amazon’s leadership in AWS and e-commerce, maintaining a Buy rating with a target price of $320, representing 44% upside.

What the market will focus on next: disclosure of performance obligations and AWS capacity utilization

Multiple institutions see subsequent disclosures as key to short-term valuation. UBS notes investors will focus on the Performance Obligation disclosures during earnings calls, which will provide references for order and delivery pace amid higher capital expenditures.

Citi states they will closely monitor AWS growth drivers, capacity supply, backlog and efficiency trends, Leo-related costs, and detailed timing of 2026 capital spending.

Against the backdrop of AWS’s renewed acceleration, Amazon’s next key questions will shift from “Can it grow?” to “At what cost?” and “When will high-intensity investments translate into more certain profit and cash flow improvements?”

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