HSBC Research Report: AWS Revenue Up 37%, Amazon Q3 Expected to Exceed Upper End of Guidance

AWS revenue grew 37% year-over-year in Q2, marking the fastest growth rate in 18 quarters. HSBC projects Q3 operating profit at $27 billion, exceeding the company's guidance upper bound of $26.5 billion. While market concerns linger regarding the sustainability of hyperscaler capital expenditures, HSBC considers this a miscalculation, viewing Amazon's stock as undervalued.

In its Oct 12, 2026 report, HSBC maintains a Buy rating on Amazon with a target price of $310, representing 22.0% upside from the Oct 8 closing price of $254.06. Q3 earnings will be released on Oct 29, with HSBC forecasting revenue of $203.3 billion, surpassing the guidance cap of $202 billion. Accelerating AWS growth, expanding annual recurring revenue (ARR) from AI services, and increased contributions from proprietary chips form the core support.

AWS Revenue Accelerates for Five Consecutive Quarters

Amazon has recorded accelerating sales growth for five consecutive quarters. Net sales reached $200.6 billion in Q2, up 19.6% year-over-year, exceeding Visible Alpha consensus estimates by 2.1%. AWS revenue hit $42.2 billion in Q2, up 37% year-over-year, beating consensus estimates by 4%, marking the fastest growth in 18 quarters. AWS growth was 28% in Q1.

AWS generated $16.6 billion in operating profit in Q2, up 59.4% year-over-year, exceeding consensus estimates by 18.4%. Operating margin stood at 39.3%, reaching 37.9% after adjusting for energy contract impacts, above consensus expectations of approximately 34%. AWS accounted for roughly 61% of the group's operating profit, up from 53% in the same period last year.

HSBC forecasts Q3 AWS revenue at $45.1 billion, up 36.8% year-over-year. Growth stems from five factors: enterprise IT spend shifting to the cloud and accelerated adoption of AI agents; net new compute capacity of 7 to 8 gigawatts between late 2025 and late 2027, doubling capacity; AI service ARR exceeding $20 billion, up from $15 billion in Q1; proprietary chip ARR surpassing $25 billion, up from approximately $5 billion at the start of the year; and an order backlog of $496 billion, more than doubling year-to-date.

Expanding Contributions from AI and Proprietary Chips

AI service ARR exceeds $20 billion, accounting for over 10% of total ARR. ARR for proprietary chips Trainium and Graviton surpasses $25 billion, up from $20 billion at the end of Q1 and $10 billion at the end of FY2025. These proprietary chips reduce reliance on Nvidia GPUs and improve inference costs.

Amazon's platform model exposes it less to concerns over frontier model training costs and security compared to leading AI labs. HSBC believes that Amazon's positioning in AI inference and proprietary chips gives it structural advantages throughout the cloud and AI cycles.

Regarding capital expenditures, management raised FY2026 CapEx guidance from $200 billion to $220 billion in Q2. HSBC forecasts CapEx at $220 billion for FY2026, $270 billion for FY2027, and $324 billion for FY2028. HSBC expects that Q3 results will not see further upward revisions to CapEx guidance.

Conservative Q3 Guidance

The Q3 net sales guidance ranges from $197 billion to $202 billion, representing year-over-year growth of 9.3% to 12.0%. The midpoint is $199.5 billion, up 10.7%. The growth rate decelerated compared to Q2, primarily due to Prime Day being moved to June, which dragged performance by approximately 400 basis points. Currency headwinds accounted for roughly 80 basis points.

Q3 operating profit guidance ranges from $22.5 billion to $26.5 billion, up 2.7% to 21.0% year-over-year. Adjusted operating profit for Q3 last year was $21.9 billion. HSBC projects Q3 operating profit at $27 billion, exceeding the guidance ceiling. The consensus estimate stands at $26.1 billion, slightly below the upper bound.

Amazon has surpassed its operating profit guidance upper bound for 15 consecutive quarters. HSBC considers the upper bound to be a more realistic benchmark. Q2 operating profit reached $27.5 billion, beating consensus estimates by 15.4%, marking the 15th consecutive quarter above the cap. HSBC forecasts Q3 net sales at $203.3 billion and operating profit at $27 billion, both slightly exceeding the guidance ceiling.

SOTP Valuation Underpins Target Price

HSBC has switched its valuation methodology from discounted cash flow (DCF) to sum-of-the-parts (SOTP) to align with its technology sector coverage framework. AWS is valued at a 28x EV/EBIT multiple for FY2027, consistent with Google Cloud. Non-AWS businesses are valued at 22x, referencing the weighted average of U.S. retailers.

The total SOTP valuation amounts to $353.4 billion. After deducting net debt of $10 billion, the equity valuation reaches $343.4 billion. Based on 11.057 billion shares outstanding, the target price is set at $310, offering 22.0% upside.

HSBC made minor upward revisions to revenue and operating profit forecasts for FY2026 through FY2028, primarily reflecting upgraded assumptions for advertising and AWS revenues. EPS is projected at $12.73 for FY2026, $10.30 for FY2027, and $12.91 for FY2028.

Amazon's stock pulled back following its Q2 earnings report, driven by market concerns over the sustainability of hyperscaler CapEx and AI demand. HSBC views this as a miscalculation. With accelerating AWS growth and expanding margins, the stock has lagged behind Meta and Microsoft. Given HSBC's target price, Amazon holds greater upside potential. Q3 results and AWS outlook remain key follow-up catalysts.

Disclaimer

This article compiles and interprets a third-party broker research report (HSBC, October 12, 2026) by TechFlow Research, incorporating public market information. The ratings, target prices, earnings forecasts, and related judgments cited herein are solely those of the broker's analyst, reflecting only their institution's stance, not the views of TechFlow Research, and do not constitute investment advice.

Markets carry risk, and decisions must be independent. This article should not serve as a basis for buying or selling any securities.

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