Amazon's revenue in Q1 reaches $181.5 billion, but the $16.8 billion gain from Anthropic inflates net income, while free cash flow declines by 95%.

      **TL;DR**

      In the first quarter of 2026, Amazon reported revenues of $181.5 billion and a net income of $30.3 billion; however, $16.8 billion of the pre-tax profit was due to a mark-to-market gain from its Anthropic investment rather than its core operations. AWS experienced a 28% revenue growth, reaching $37.6 billion, the fastest in three years, while free cash flow plummeted 95% to $1.2 billion, as capital expenditures soared to $44.2 billion.

      Amazon's first-quarter 2026 net sales reached $181.5 billion, a 17% year-on-year increase that surpassed analyst expectations by over $4 billion. The net income doubled to $30.3 billion from $17.1 billion in the previous year, with earnings per share at $2.78, outperforming the $1.64 consensus. AWS revenue grew by 28% to $37.6 billion, marking its fastest growth since 2022, while advertising revenue rose by 24% to $17.2 billion. Capital expenditures increased significantly to $44.2 billion from $25 billion the previous year. Although the headline figures were impressive, the profit sources were more complex.

      Approximately $16.8 billion of Amazon's pre-tax income this quarter derived from a revaluation of its investment in Anthropic, the AI company behind the Claude model family. Amazon has committed up to $25 billion to Anthropic, and part of that investment was converted during the quarter from convertible notes into preferred stock due to Anthropic's latest funding. This accounting gain elevated Amazon’s $8 billion investment in Anthropic to a market value surpassing $70 billion. Excluding the Anthropic gain, Amazon's operating profit was $23.9 billion, still robust but significant to note since more than half of the income that boosted earnings per share did not come from product sales or cloud services, but from ownership in a currently unprofitable company.

      **The Cloud Engine**

      The underlying operational performance, apart from the Anthropic gain, is genuinely robust. AWS’s revenue increase of 28% indicates an acceleration from 24% in the previous quarter, marking its fastest growth in over three years. Operating income from AWS reached $14.2 billion, far exceeding the consensus of $12.8 billion. CEO Andy Jassy mentioned that the demand for AWS continues to outstrip supply, with a growing backlog as enterprise clients sign multi-year cloud and AI agreements.

      Amazon’s custom chip division, encompassing Trainium, Graviton, and Nitro, is now generating over $20 billion annually with triple-digit growth. Jassy has indicated it could potentially become a $50 billion business if sold in the open market. Trainium2, Amazon's AI training and inference accelerator, has nearly sold out, and the upcoming Trainium3, which started shipping in early 2026, is also almost fully subscribed. Uber joined the ranks of Trainium customers this quarter, while Meta signed a multibillion-dollar contract for Graviton5 processors, as demand for AI computing surpassed its infrastructure capabilities. This custom chip initiative is transforming AWS from merely a cloud platform into a vertically integrated computing provider, competing not only with Microsoft Azure and Google Cloud but also increasingly with Nvidia.

      **The Accounting Question**

      The gain from the Anthropic investment raises questions that extend beyond Amazon to other large tech firms with substantial investments in private AI companies. According to current accounting standards, Amazon must adjust its Anthropic investment to fair value following significant financing events that provide new reference prices. Anthropic’s shares are reportedly valued at an implied $1 trillion on secondary markets, and the company is said to be in early discussions for an IPO as soon as October 2026. Each upward revaluation directly affects Amazon's net income, artificially inflating earnings per share without any real cash flow.

      This phenomenon is not exclusive to Amazon. Alphabet also has a significant stake in Anthropic through its own investment. According to a Fortune analysis released concurrently with the earnings report, around half of both Amazon's and Alphabet's exceptional AI profits in Q1 2026 stemmed from their investments in Anthropic rather than from their operational activities. This creates a scenario where AI companies investing the most in infrastructure, and generating minimal cash flow, are simultaneously reporting record earnings due to the increased valuations of the private companies they’ve invested in.

      **The Cash Flow Problem**

      Amazon's free cash flow over the past twelve months has declined to $1.2 billion, a staggering 95% drop compared to the previous year. This decline is largely attributed to extensive capital expenditures. In the quarter, Amazon spent $44.2 billion on data centers, networking equipment, custom chips, and the necessary infrastructure to address AI demand. The company has committed around $200 billion in capital expenditures for 2026, making it the largest infrastructure spender among