AWS cloud revenue surges 37% as AI demand outstrips capacity

AWS reported its strongest quarterly growth in over four years, with revenue climbing 37% year-over-year to $42.2 billion for the quarter ending June 30. The performance exceeded analyst expectations of 31.21% growth and marked the cloud division’s highest revenue increase in 18 quarters. Amazon CEO Andy Jassy described the momentum as a "genuine boom," noting that AWS added $4.6 billion in revenue from the previous quarter—nearly double its largest prior quarterly gain. Despite the surge, the company acknowledged that demand continues to outpace available cloud capacity, a challenge unlikely to ease before 2027 or later.

Capacity constraints and spending surge

Amazon raised its 2026 capital expenditure forecast from $200 billion to $220 billion, with the majority allocated to expanding cloud data centers and AI infrastructure. However, Jassy cautioned that even this increase would not fully address current demand. Customers have already reserved most of AWS’s planned 2027 capacity, with some securing slots for 2028. The cloud backlog grew to $496 billion, up from $364 billion three months earlier, reflecting the intensity of demand.

Memory costs were cited as the primary driver behind the $20 billion spending increase, though Amazon did not clarify whether this referred to high-bandwidth memory for AI accelerators or standard server memory. Regardless, the additional spending does not translate into proportional increases in usable cloud capacity. Jassy explained that cloud data centers typically require two years of lead time before becoming operational, meaning today’s investments will not alleviate shortages in the near term. This timing gap contributed to a $7.6 billion negative free cash flow over the trailing 12 months, despite a 33% rise in operating cash flow to $161.4 billion.

AI demand and broader cloud growth

While AI-specific offerings have dominated headlines, Jassy emphasized that AI adoption is also driving demand for AWS’s core cloud services, including computing, storage, and databases. The company’s AI and semiconductor businesses have each surpassed a $25 billion annualized revenue run rate, underscoring the scale of investment in these areas. AWS operating income rose to $16.6 billion, up from $10.2 billion a year earlier, with a 39% operating margin.

The capacity crunch is not unique to AWS, but the company’s transparency about the issue highlights broader industry challenges. Cloud providers are racing to expand infrastructure to accommodate AI workloads, which require significantly more resources than traditional cloud services. The structural lag between capital spending and operational capacity means customers may continue to face constraints even as providers accelerate investments.

What to watch

The mismatch between demand and supply is expected to persist into 2027, with AWS already seeing customers lock in capacity for 2028. The company’s ability to scale infrastructure efficiently will be critical, particularly as competitors like Microsoft Azure and Google Cloud also ramp up spending. For customers, this environment may lead to longer lead times for cloud resources, higher costs, or both. Observers will also monitor how AWS balances its AI ambitions with the need to support traditional cloud workloads, which remain a significant revenue driver.