013Can the cloud pay for the AI capex?

What changed

Microsoft. Azure’s growth fell from 50% in the quarter to September 2021 to 26% in the quarter to June 2023, as customers cut their cloud bills. It has climbed since, to 43% in the quarter to June 2026 (42% on the definition Microsoft now reports), and Microsoft guides 44–45% in constant currency for the quarter to September. Azure passed $100B of revenue in the year to June. Microsoft says demand still exceeds the capacity it can bring online and expects to roughly double that capacity in two years.

Amazon. AWS slowed from 40% at the end of 2021 to 12% in mid-2023. It grew about 17% in the first half of 2025, then 20%, 24%, 28% and, in the second quarter of 2026, 37%, its fastest in 18 quarters. Amazon says it won’t have enough capacity for all of 2026’s demand and expects the same in 2027. The whole market is moving: Synergy Research puts cloud infrastructure spending up 43% in the second quarter, with generative-AI services up 165%.

Microsoft’s points show AI rising from about 1 point of Azure’s growth in mid-2023 to 16 points by March 2025, when AI services were about 19% of Azure. The rest of Azure slowed as it did so, from 24 points of growth in the quarter to March 2024 to 17 a year later. Microsoft has since given only its AI business’s run-rate, which “surpassed an annual revenue run rate of $37 billion” in April 2026, Copilots included. At a 17% trend for the rest, AI adds about 20 points of Azure’s growth through 2025 and 26 by mid-2026, when it is about 34% of Azure. By the same chain, AI was already about 5% of Azure in 2022. Earlier capex paid for that, so for the returns we leave it, and its growth, out.

Is growth accelerating?

Yes, at both, and capacity is the limit. Azure grew 39–40% for four quarters, then 43%, and Microsoft guides 44–45%. AWS has accelerated for five straight quarters. Microsoft’s commercial backlog reached $678B in June, up 84%; excluding OpenAI it grew 25%, and all of the quarter’s increase came from customers other than the frontier labs. AWS’s went from $195B to $496B in a year, with an average remaining life of 6.4 years, after OpenAI added $100B of commitments and Anthropic more than $100B.

How we split AI from trend

Both trends are checked against what the companies themselves disclose. Azure, 17% a year from 2025: by Microsoft’s own split, Azure outside AI grew about 24% in 2024 and was down to 19% by early 2025. At 17%, Azure’s AI services ran at about $30B a year in early 2026; add the Copilots and that fits Microsoft’s AI run-rate of more than $37B in April. AWS, 14.5%: it grew 13% in 2023 and 19% in 2024, when AI was a small business. At 14.5%, AWS’s AI revenue ran at about $20B a year in the first quarter of 2026 and $32B in the second; Amazon says it was “over $15 billion in Q1 2026” and above $25B in the second quarter. Much above 16%, our method falls short of Amazon’s own figures, so the simulation drops draws that do. The rest of each gap we leave to things that aren’t AI.

At these settings AI adds 19 points to Azure’s growth in 2025 and 26 in 2026, 32% of this year’s revenue, and 5 and 17 points to AWS’s, 18%. AI’s points are the growth in AI’s revenue over last year’s revenue, so they and the rest add up to the year’s growth. Microsoft’s Copilots aren’t counted: Microsoft 365’s commercial cloud revenue has grown 14–16% a year in constant currency since mid-2024, no faster than before Copilot.

How the return is counted

Returns. Cloud revenue needs capacity, so after 2026 we tie AI revenue to it. We assume capex starts earning two quarters after it is spent: servers earn within weeks of landing, data centers a year or more after work starts. On that basis each dollar of incremental capex brought in about 40 cents a year of AI revenue at Amazon in 2026 and 26 cents at Microsoft. Microsoft’s is lower, probably because more of its capex has gone into things Azure’s revenue doesn’t show: its own models and Copilots, capacity for OpenAI’s research, and data-center sites ahead of use. At Microsoft we also leave out the 10% of Azure’s AI revenue we estimate runs on capacity it rents from neoclouds (it paid CoreWeave about $3.4B in 2025), and that capacity’s cost. Each dollar of capacity keeps renting at that rate, less 2.5% a year as compute gets cheaper, at a 60% cash margin before depreciation. That is a little above AWS’s 52% (operating income plus depreciation) in 2025; AWS’s operating margin was 39% in the second quarter of 2026, up from 33% a year earlier.

Costs. All capex above a pre-buildout intensity: 14% of Microsoft’s no-AI revenue (its 2019–23 average, finance leases included) and 31% of AWS’s, about $449B at Microsoft and $367B at Amazon over 2023–27. Microsoft’s 2026 capex is its April guide, $190B, before it moved more data-center leases off capex. Servers, 60% of capex (Microsoft has said half to two-thirds), are replaced every 6 years at Microsoft and 5 at Amazon, at 75% of their cost, for the 75% of the fleet that rents to customers. Servers get bonus depreciation for tax (100% since 2025), data centers go over 20 years. Nothing is counted after 2040, though the data centers will still stand.

Results. Through 2026: 13.6% at Amazon, 4.1% at Microsoft. Adding 2027’s build: 12.8% and 3.0%, paid back in 2033 and 2037. The cloud’s return barely depends on whether 2027 is spent, since new capacity earns what the old does as long as it rents at today’s rates; if 2027’s rents for 20% less, the returns fall to 10.4% and 1.3%. The biggest unknown is how long capex takes to start earning, because that sets how much each dollar in service earns today. If capex earns from one quarter after it is spent, more of it is already in service, each dollar earns less, and the returns fall to 6.2% at Amazon and −1.3% at Microsoft; from three quarters, they rise to 20.3% and 7.5%. Every ten points of margin move the returns four to five points. On the same question, Meta’s ads return about 18% and Alphabet’s ads and Cloud 13% (pack 011).

Two customers, and two stakes

The labs are much of the AI revenue. Microsoft says nearly 90% of Microsoft Cloud’s $214B of revenue in fiscal 2026 came from customers other than frontier-model companies. That leaves the labs about $22–26B, against our estimate of about $29B for all of Azure’s AI revenue that year, so we put them at 80% of it; OpenAI was 45% of Microsoft’s commercial backlog at the end of 2025. At Amazon, OpenAI’s and Anthropic’s commitments are about half the backlog, and we use 50%. The labs pay with money they raise: OpenAI’s own plan has it burning about $278B of cash over 2026–30 (pack 004), though both labs’ revenue is compounding fast (pack 008). If from 2028 they paid only half their bills, and the capacity they left were re-let at half price, Microsoft’s return through 2027 would fall to −6.0% and Amazon’s to 7.2%.

The stakes are where the payoff might be. This pack counts them at zero. Amazon carried its Anthropic notes and preferred stock at about $190B at the end of June, against $18B invested, and has booked about $80B of pre-tax gains on them since early 2025; it has also put $50B into OpenAI, which committed another $100B to AWS. Microsoft’s roughly 27% of OpenAI was valued at about $135B in October 2025; OpenAI has since raised money at $852B. Charge the cash put into the labs and value the stakes at nothing, and the returns through 2027 are 8.6% at Amazon and 2.4% at Microsoft; all-in, with running costs and Microsoft’s neocloud contracts too, 8.1% and 0.7%. Count the stakes at their marks and the AI build has already paid for a good part of itself, on paper.

When does the cash come back?

AI capex through 2027 clears a 10% return in 64% of our draws for Amazon and 8% for Microsoft, and clears zero in 97% and 72%. All-in, it clears 10% in 36% and 3%. The medians, 12.5% and 3.0%, sit within a point of the base case. Andy Jassy’s case is that the returns come later: “The FCF and ROIC for these investments are cumulatively quite attractive a couple years after being in service.” Amazon’s free cash flow was −$7.6B over the twelve months to June. Microsoft’s was $19.6B in the June quarter, down 23% on a year earlier, and it guides capex up again in fiscal 2027.

What to watch

Microsoft, October 28. Azure against the 44–45% guide, now on the narrower definition; capex against “over $50 billion” for the quarter and any figure for fiscal 2027; whether the backlog keeps growing outside OpenAI.

Amazon, October 29. AWS against analysts’ 30–35%; capex against $220B for the year and a first word on 2027; the backlog after the OpenAI and Anthropic expansions; the AI run-rate, last above $25B.

The labs’ funding. OpenAI’s next round and Anthropic’s IPO decide whether the bills behind half of AWS’s backlog, and most of Azure’s AI revenue, get paid. In our base case a lab dollar is worth the same as any other; the labs chart shows what happens when it isn’t.