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Amazon (NASDAQ:AMZN) has become one of the most compelling buys among Magnificent Seven stocks and large-cap growth stocks in general. There are two converging factors that make Amazon a screaming buy right now.
One is surging growth, supported by a massive $496 billion Amazon Web Services cloud computing backlog, which is contracts in the pipeline waiting to be executed upon. That is up more than double from the start of 2026 when it had just $244 billion in backlog.
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That should allow Amazon to continue the momentum it has seen so far this year. The fiscal second quarter was Amazon's best quarter in more than four years. Overall revenue increased 20% to $200.6 billion, marking its best quarter of revenue growth since 2021.
Amazon's cash cow, its AWS business, saw sales jump 37%, marking its best results in 18 quarters. In addition, Amazon saw its AWS operating margin jump 650 basis points to 39.4%, up from 32.9% in Q2 2025. If you exclude a one-time accounting gain, its a 520 basis point increase.
Overall, net income rose to $62.6 billion Q2, or $5.75 per share, up from $1.68 per share in Q2 2025. That is skewed by a huge $53.4 billion gain from its investment in Anthropic, but it still beat adjusted earnings estimates. That is significant growth, especially in the face of huge capital expenditures, which had concerned a lot of investors earlier this year, thinking it would crush earnings.
That leads to the second major factor that makes Amazon a buy: its valuation.
Amazon stock started the year trending lower out of concerns about its then $200 billion proposed for capital expenditures, now $220 billion. Investors were worried earlier this year for a few reasons -- one, the number was 50% higher than 2025; two, its AWS cloud business saw slowing growth and was losing market share; and three, it would eat into their free cash flow and lead to negative cash flow in Q2.
The stock price has since recovered and is now up about 13% year-to-date. As noted, the concerns about overspending on capex were somewhat alleviated by surging growth, an overflowing pipeline, and the realization that the spending is needed to meet demand.
Cash flow was negative in Q2, but CEO Andy Jassy said on the recent earnings call that "when demand is necessitating so many data centers being built simultaneously in advance of when we can start monetizing them, we'll spend a lot of capex and encounter free cash flow headwinds until these data centers come online." But after a few years when the servers are being used, revenue growth will outpace capex growth and free cash flow will return -- at least that's the plan.
Despite these cash flow headwinds, Amazon looks like a must own stock right now for not just its growth, but its cheap valuation. It is trading at around 20 times earnings, which is near the lowest it has been in more than 10 years. It is a compelling buy at this valuation, given its overflowing near half a trillion dollar pipeline.
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AWS Backlog Hits $496 Billion While Cloud Margins Surge to 39% Making Amazon a Must-Own Growth Stock was originally published by The Motley Fool
