Amazon's AWS Margins Could Reach 46% by 2027, UBS Says

UBS has raised its price target on Amazon (AMZN) to $348 from $318, reiterating a Buy rating on the stock ahead of its third-quarter earnings report. The bank's analysts contend that consensus estimates for the long-term profitability of Amazon Web Services (AWS) are overly conservative.

AWS Margin Forecasts Diverge

The core of the bank's thesis is a significant gap between its projections and Wall Street's expectations for AWS. UBS forecasts the cloud computing division will achieve a 46% operating margin by 2027, well above the current consensus estimate of 38%.

Analyst Stephen Ju addressed investor concerns that higher-margin AI workloads could be dilutive. "Our answer is equally as straightforward: they cannot spend the revenue dollars fast enough," he wrote in a note. UBS projects AWS is on track to add approximately $80 billion in revenue, which will far outpace the growth in associated costs and depreciation.

Addressing Capex and Cash Flow Concerns

UBS noted that Amazon's stock performance has been muted by investor fears that massive capital expenditures, potentially exceeding $300 billion by 2027, could result in zero or negative free cash flow. The bank's analysis suggests these fears are misplaced, as margin expansion at AWS will drive profitability higher.

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To maintain margins at the current level of roughly 39%, Amazon would need to increase its SG&A spending by about $29 billion, a pace UBS considers highly unlikely. The bank believes that as Amazon continues to report strong quarterly results, investors will be "forced to raise margin forecasts," leading to higher earnings per share (EPS) and free cash flow (FCF) estimates.

Broader Catalysts for Growth

Beyond the optimistic outlook for AWS, UBS also pointed to several other positive factors supporting its bullish stance on Amazon. These include:

• Faster-than-expected margin expansion in its core e-commerce business.
• Continued investment and growth in same-day delivery and grocery services.
• The increasing contribution from advertising on its Prime Video streaming service.