Amazon's revenue for Q1 reached $181.5 billion; however, a $16.8 billion gain from Anthropic has inflated net income, while free cash flow plummeted by 95%.

      TL;DR

      Amazon reported Q1 2026 revenue of $181.5 billion and net income of $30.3 billion, with $16.8 billion of pre-tax profit stemming from a mark-to-market gain on its Anthropic investment rather than from its operations. AWS revenue surged by 28% to $37.6 billion, the fastest growth rate in three years. However, free cash flow plummeted by 95% to $1.2 billion as capital expenditures reached $44.2 billion.

      In Q1 2026, Amazon's net sales increased by 17% year over year to $181.5 billion, surpassing analyst expectations by over $4 billion. Net income nearly doubled to $30.3 billion from $17.1 billion a year prior, with earnings per share at $2.78, exceeding the consensus of $1.64. AWS grew its revenue by 28% to $37.6 billion, marking its fastest growth since 2022, and advertising revenue increased by 24% to $17.2 billion. Capital expenditures rose to $44.2 billion from $25 billion last year. While the headline figures were impressive, the composition of profits was more complex.

      Approximately $16.8 billion of Amazon’s pre-tax income for the quarter was derived from a revaluation of its investment in Anthropic, the AI firm behind the Claude models. Amazon has invested up to $25 billion in Anthropic, with part of that investment converting from convertible notes to preferred stock during the quarter, influenced by Anthropic's latest funding round. This accounting gain increased Amazon's $8 billion cumulative investment in Anthropic to a market value exceeding $70 billion. Excluding the Anthropic gain, Amazon’s operating profit would be $23.9 billion, which is still strong but noteworthy. More than half of the net income that fueled the earnings-per-share beat originated not from product sales or cloud services but from a stake in a company that has yet to achieve profitability.

      The operational performance below the Anthropic gain is robust. AWS's 28% revenue growth indicates an acceleration from the previous quarter’s 24% rate, representing the division’s fastest growth since 2022. Operating income from AWS reached $14.2 billion, significantly above the $12.8 billion consensus estimate. CEO Andy Jassy informed analysts that demand for AWS continues to exceed supply, resulting in growing backlogs as enterprise clients engage in multi-year cloud and AI contracts.

      Amazon's custom chip division, which includes Trainium, Graviton, and Nitro, now generates over $20 billion in annualized revenue at triple-digit growth rates. Jassy suggested it could evolve into a $50 billion annual business if sold in the open market. The Trainium2, Amazon's AI training and inference accelerator, has almost sold out, and the forthcoming Trainium3, which began shipping in early 2026, is nearing full subscription. Uber has recently joined Amazon's customer roster for Trainium, while Meta has signed a multibillion-dollar agreement for Graviton5 processors due to heightened AI compute demand outstripping its capacity. This custom chip initiative is transforming AWS from a cloud platform into a vertically integrated compute provider, increasingly competing with Microsoft Azure, Google Cloud, and Nvidia.

      The accounting implications of the Anthropic investment gain raise questions relevant not only to Amazon but also to other major tech firms with significant investments in private AI companies. According to current accounting standards, Amazon must assess its Anthropic investment at fair value following any significant financing event that provides a new price reference. Anthropic's shares have been trading at an implied valuation of $1 trillion in secondary markets, and the company is reportedly engaged in early discussions regarding an IPO as soon as October 2026. Each increase in valuation is directly reflected in Amazon’s net income, artificially boosting earnings per share without any actual cash inflow.

      This situation is not exclusive to Amazon. Alphabet also holds a large stake in Anthropic through its investment commitments. An analysis by Fortune, published on the same day as the earnings report, noted that about half of the "extraordinary AI profits" reported by both Amazon and Alphabet in Q1 2026 originated from their respective stakes in Anthropic, rather than their operational businesses. This creates a scenario where the AI companies spending the most on infrastructure, and consequently generating the least free cash flow, are concurrently reporting record earnings due to their investments in privately valued companies that are marked up by external investors.

      The free cash flow dilemma

      Amazon’s trailing twelve-month free cash flow decreased to $1.2 billion, reflecting a 95% year-over-year decline, primarily due to capital expenditures. In the quarter, Amazon invested $44.2 billion in data centers, networking equipment, custom chips, and the infrastructure needed to support AI demand. The total capital expenditure commitments for 2026 are approximately $200 billion, making Amazon the largest spender