AWS cloud growth accelerates as AI demand strains capacity

Amazon reported its strongest growth for AWS in four years during the second quarter. Revenue reached $42.2 billion, a 37 percent increase year over year. Despite this performance, the company faces a persistent gap between available cloud infrastructure and customer demand. CEO Andy Jassy noted that even with an increased capital expenditure budget of $220 billion for 2026, the company expects capacity constraints to remain through 2027.

The backlog for AWS reached $496 billion by the end of the quarter, up significantly from $364 billion just three months prior. Long-term customer commitments are locking in capacity well into 2027 and 2028. This advance reservation model allows the company to plan its data center construction and hardware purchases with greater certainty, though it does not eliminate the lead times required for grid connections and specialized equipment.

Scaling this infrastructure is a multi-year project. Data center construction often begins two years before a site opens, while power and equipment constraints continue to limit how quickly new capacity enters service. Higher memory costs also contributed to the increased spending forecast, as demand for high-bandwidth memory drives expenses across AI servers.

Operating margins for the cloud division remained strong at 39 percent, with operating income climbing to $16.6 billion. However, heavy investment in property and equipment shifted trailing 12-month free cash flow into negative territory. The company maintains that these investments are tied to specific customer requirements and carry a return on investment over the five to six-year life of the hardware.