Amazon designs its own computer chips. That business may now be big enough to matter by itself. You probably picture Amazon as a giant store with a cloud arm. And you probably assume it buys its chips from someone else. Two things must be true for these chips to change how you see the stock. The first is size. The second is that owning the chips earns a return on the money Amazon is spending. Start with size.
How Big Is Amazon’s Chip Business?
Management gave a number on its fiscal Q2 2026 call. The chips business runs at an annual revenue rate of over $25 billion. The business is growing at triple-digit percentages year over year. The chips sit inside AWS, the cloud unit. AWS revenue was $42.2 billion in that quarter. Revenue was up 36.7% from a year earlier. Annualized, AWS runs at $169 billion. So the chips are a real business. They are still only a slice of AWS, not the whole of it.
Amazon designs several custom chips. Its flagship processor for general-purpose computing is Graviton, which management said is used by 98% of the thousand largest customers of its EC2 compute service. The other is built for artificial intelligence work. Anthropic and OpenAI have made multi-year, multi-gigawatt commitments to that AI chip, management said. So size is settled. The second thing is harder.
Why Does That Matter While Amazon Spends So Heavily?
Because the spending is what worries people about this stock. Amazon expects to spend about $220 billion of cash on capital projects in 2026. Management blamed the higher cost of memory for the rise from its earlier plan of about $200 billion.
Against the index the picture is mixed. Amazon trades at 20.3 times its earnings. The S&P 500 trades at 22.6 times. On operating cash flow the order flips. Amazon trades at 17.0 times. The index trades at 14.7 times. Amazon’s revenue has grown 13.0% a year over three years. By comparison, total aggregate S&P 500 revenue has grown at an annualized rate of 5.8% over the same period. The price appears to carry some doubt about what that spending will earn.
Owning the chips is management’s answer. Management said the margins and returns in AI are tracking the core cloud business at the same stage. Management put them a little ahead. Management also said the order backlog stands at $496 billion. That backlog is growing triple digits year over year. And Amazon has more demand than it can serve in 2026. Management expects that again in 2027.
Owning the chips does not answer everything. Management did not put a profit figure on the chips. On returns you are taking management at its word. An analyst asked how a 39% cloud operating margin could be sustained. Management said margins will fluctuate with investment levels and mix. So what would tell you the second thing is failing?
What Would Change Your Mind About Amazon?
Not the chip figures. Management said prices in deals already signed hold for the length of those contracts. New agreements take today’s costs into account. The thing to watch is the operating profit Amazon reports, and the cloud margin inside it.
The next date is Amazon’s fiscal Q3 2026 report. Management guided third-quarter operating income to at least $22.5 billion. The top of that guide is $26.5 billion. Amazon reported $27.5 billion for the second quarter. That figure included about $1.2 billion of benefits from two items that reduced expenses. So profit is guided to step down. Growth is a separate matter. Prime Day fell in fiscal Q2 2026 rather than the third quarter. Management guided third-quarter net sales to grow between 10% and 14%, noting that year-over-year growth would have been nearly 400 basis points higher without that shift.
Size is not in doubt any more. The return on all that spending still is in doubt. If operating income lands inside that guided range, both things you need stay true. If the margin slides while the spending climbs, the spending is the story.
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