Introduction#
Analysts from Wolfe Research believe that Amazon.com Inc.'s cloud business, Amazon Web Services (AWS), may experience stronger growth than many investors anticipate. This growth is expected to be fueled by increasing demand for artificial intelligence (AI) and an expansion in computing capacity.
Growth Projections#
Wolfe analysts project that AWS will achieve approximately 30% annual revenue growth over the next three years. This is notably higher than the 25% growth that Wall Street analysts currently expect. The optimism surrounding AWS is attributed to several factors, including rising demand for AI computing and partnerships with significant developers in the tech industry.
AI Partnerships and Revenue#
One key factor in Wolfe's forecast is the anticipated revenue from AI companies. For instance, the AI firm Anthropic is expected to generate around $15.2 billion in revenue related to AWS by 2026. This revenue will come from cloud computing usage, access to Amazon’s specialized chips known as Trainium, and revenue-sharing agreements. Additionally, contributions from OpenAI are also expected to grow, although the impact of a recently announced $100 billion contract may not be felt until 2027.
Infrastructure Investment#
To support this growth, AWS will need to expand its data center capacity. Wolfe estimates that Amazon will add about six gigawatts of computing capacity each year in 2026 and 2027. However, this expansion will require significant investment, with estimates suggesting that Amazon could spend around $1 trillion on capital expenditures from 2024 to 2030, primarily for AWS.
Long-Term Outlook#
While this heavy spending might impact Amazon's free cash flow in the short term, Wolfe anticipates that returns on invested capital will stabilize around 2027 and start to improve by 2029 as the new infrastructure begins generating revenue. Currently, Wolfe has set a price target of $255 for Amazon's stock, based on a multiple of approximately 25 times its estimated earnings for 2027, which analysts consider reasonable given Amazon's growth potential in both cloud computing and retail.