Amazon's revenue for Q1 reaches $181.5 billion, but a $16.8 billion gain from Anthropic boosts net income while free cash flow plummets by 95%.
**TL;DR**
In Q1 2026, Amazon announced revenue of $181.5 billion and net income of $30.3 billion, although $16.8 billion of this profit was attributed to a mark-to-market gain from its Anthropic investment rather than from core operations. AWS saw a growth of 28 percent, reaching $37.6 billion, marking its fastest growth in three years. However, free cash flow plummeted by 95 percent to $1.2 billion due to capital expenditures hitting $44.2 billion.
Amazon's net sales for the first quarter of 2026 rose to $181.5 billion, a 17 percent year-over-year increase, surpassing analyst predictions by over $4 billion. Net income grew nearly twofold from $17.1 billion to $30.3 billion compared to the previous year. Earnings per share were $2.78, significantly higher than the consensus of $1.64. AWS revenue increased by 28 percent to $37.6 billion, the highest growth rate since 2022. Advertising revenue also climbed 24 percent to $17.2 billion, while capital expenditures rose to $44.2 billion from $25 billion a year prior. While the headline figures were impressive, the profit breakdown was more complex.
Amazon's pre-tax income for the quarter included approximately $16.8 billion from the revaluation of its investment in Anthropic, the AI company responsible for the Claude models. Amazon has pledged up to $25 billion to Anthropic, with part of that investment being converted from convertible notes into preferred stock during the quarter due to Anthropic's recent funding round. This accounting gain marked up Amazon’s $8 billion cumulative investment in Anthropic to a value exceeding $70 billion. Excluding this gain, Amazon's operating profit was still a solid $23.9 billion, but the distinction is essential. More than half of the net income contributing to the earnings-per-share beat originated not from product sales or cloud services but from a stake in a company that has yet to become profitable.
**The Cloud Engine**
The underlying operational performance, aside from the Anthropic gain, is quite strong. AWS's 28 percent revenue growth indicates an acceleration from the previous quarter's 24 percent, marking the fastest growth since 2022. AWS's operating income reached $14.2 billion, exceeding the $12.8 billion consensus. CEO Andy Jassy noted that AWS demand continues to surpass supply, leading to a growing backlog as enterprise clients commit to long-term cloud and AI contracts.
Amazon's custom chip division, which includes Trainium, Graviton, and Nitro, now generates over $20 billion annually, growing at triple-digit rates. Jassy suggested it could potentially become a $50 billion annual business in the open market. The current version, Trainium2, has largely sold out, and the next iteration, Trainium3, began shipping in early 2026 and is nearly fully subscribed. During the quarter, Uber joined Amazon's roster of Trainium customers, and Meta secured a multibillion-dollar deal for Graviton5 processors amid increasing demand for AI compute resources. This custom chip strategy is transforming AWS from merely a cloud platform into a vertically integrated compute provider that competes not only with Microsoft Azure and Google Cloud but also with Nvidia.
**The Accounting Question**
The gain from the Anthropic investment poses a challenge applicable not only to Amazon but also to every major tech firm with substantial investments in private AI companies. According to existing accounting standards, Amazon is required to assess its Anthropic investment at fair value whenever a significant financing event provides a new reference price. Anthropic’s shares are reportedly trading at an implied $1 trillion valuation in secondary markets, and the company is in early discussions for an IPO that might occur as soon as October 2026. Each upward reassessment contributes directly to Amazon’s net income, inflating earnings per share without any corresponding cash influx.
This situation is not exclusive to Amazon; Alphabet has a significant investment stake in Anthropic through its own commitments. An analysis from Fortune on the same day as the earnings report highlighted that around half of Amazon's and Alphabet's remarkable Q1 2026 "AI profits" stemmed from their Anthropic investments instead of their actual operational businesses. This dynamic results in a scenario where AI firms, while incurring high infrastructure costs and producing minimal free cash flow, continue to report record earnings due to the higher valuations placed on the private companies they have invested in.
**The Cash Flow Problem**
Over the trailing twelve months, Amazon’s free cash flow dropped to $1.2 billion, a 95 percent decrease compared to the previous year. This decline is primarily linked to capital expenditures, with Amazon spending $44.2 billion in the quarter on data centers, networking gear, custom chips, and the essential infrastructure to support AI demand. The company has budgeted approximately $200
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AWS increased by 28% to reach $37.6 billion, and Amazon's custom chip division surpassed $20 billion on an annualized basis. However, over half of the net income was derived from a revaluation of its investment in Anthropic.