Amazon's $1 Billion AWS Government Deal: A Quiet Catalyst for AMZN

On August 7, the White House announced a new OneGov agreement with Amazon Web Services ("AWS"). Through this deal, AWS will provide the federal government with $1 billion worth of credits that will be used to modernize its outdated infrastructure:

• AWS services credits: Provides discounted core AWS cloud services

• AWS modernization credits: Support to help federal agencies modernize their infrastructure and application technologies

• Training credits: Offers government agency employees access to AWS training and certification

For some context, the initiative is overseen by the U.S. General Services Administration ("GSA"). The GSA is mostly known for managing the federal government's vast real estate portfolio (courthouses, federal buildings, etc.) but it is also responsible for procuring technology services for government work.

Historically, the federal government would procure technology services on a department-by-department, case-by-case basis. But an April executive order out of the White House put a new emphasis on cost-effectiveness for government contracts. That's where the OneGov Strategy comes in. Rather than a patchwork of contracts across government departments, it aims to procure technology services government-wide with standardized pricing and terms.

This AWS government contract is, in AWS CEO Matt Garman's words, a "landmark agreement" because it transforms the way federal agencies acquire similar services by developing a centralized procurement system for AWS infrastructure. Doing so helps agencies avoid exhaustive (and bureaucratic) IT procurement cycles, secures volume-based pricing and discounts, and eases the burden on taxpayers.

More importantly, this contract should finally allow the U.S. government to update their archaic, expensive, and inefficient IT systems and infrastructure. As GSA Acting Administrator Michael Rigas stated, "Through this new agreement with AWS, federal agencies will be able to enhance delivery of critical services, leverage cloud and advanced [artificial intelligence ("AI")] technologies, and dramatically reduce costs."

By using these credits to overhaul the government's infrastructure, federal agencies will have much more efficient, agile, and scalable systems at their fingertips.

And, of course, the deal is welcome news for Amazon (AMZN).

How AWS Strengthens Amazon's Growth Story

Amazon's online retail business is the most visible part of the company. It also generates the lion's share of revenue. In 2024, the online stores and third-party seller services accounted for $403 billion in revenue, or approximately 63% of the total haul.

Yet retail is not where Amazon makes its money...

Though AWS brought in a comparatively paltry $107.5 billion in revenue for 2024, AWS quietly serves as Amazon's profit engine.

In 2024, AWS accounted for only 17% of Amazon's total revenue... but it delivered around 58% of the company's operating profit. And in the first quarter of 2025, AWS comprised just 19% of Amazon's total revenue but generated 62% of its operating income.

Despite accounting for revenue that's a fraction of Amazon's retail business, AWS is responsible for an enormous share of Amazon's operating profit. In fact, Amazon's e-commerce business is sustainable, despite its paper-thin margins, because of the significant profit margins generated by AWS. And the OneGov deal with AWS is a likely catalyst for that segment, and therefore the wider company and the share price.

AWS boasts a massive infrastructure of data centers that serve millions of businesses. When a company uses the AWS platform to build their online business, they pay AWS based on platform usage... that drives subscription-like revenue. And because AWS has wide margins (operating margins were 37% in 2024), it makes AWS a profit-generating machine.

Another benefit is that AWS tends to be very "sticky." Once a customer signs up, they tend to stay. Also, once customers are integrated into the AWS ecosystem, the company has the opportunity to offer new and better services. In the tech space, this strategy is often called "land and expand."

Now, it's important to remember that the OneGov deal is for credits to use AWS services. In other words, Amazon is willing to offer savings to the U.S. government to use their services. You might not think that would directly impact future AWS growth. But the company knows what it's doing.

The federal government is a great customer to have. For one, the U.S. government has deep pockets. The U.S. Government Accountability Office ("GAO") estimates that federal contracts in fiscal year 2024 were approximately $755 billion. For another, once a company has a relationship in place with the federal government, that company tends to generate new business for years and decades. Just look at a company like Boeing (BA), which has been a go-to defense contractor since World War II.

The OneGov deal is good news for taxpayers and could arguably help the federal government upgrade and modernize its systems. But AWS is also getting a "foot in the door" by offering these generous credits. And once that relationship is established, AWS knows it can offer more and better services going forward.

Let's have a look at a few...

Amazon's AI Angle: Government Cloud + Artificial Intelligence

With its ability to efficiently handle lower-level administrative tasks, manage resources, enhance cybersecurity, and even help with decision making, AI is already making an impact within the government.

AWS looks to take that a step further by providing a cloud environment that's safe, compliant, and offers a diverse range of services and tools.

Let's take a deeper dive into the AWS infrastructure and how it benefits the U.S. government. There's foundational infrastructure like...

• Secure, government-accredited regions: AWS offers specialized cloud regions like AWS GovCloud, the AWS Secret Region, and the AWS Top Secret Region... all designed to meet security and compliance needs for government data.

• Isolated computing environments: For highly sensitive data, the Nitro System provides enhanced security that continuously monitors, protects, and verifies the instance hardware and firmware. Nitro System's security model is locked down and prohibits administrative access, eliminating the possibility of human error and tampering.

• Compliance-ready services: AWS supports a broad range of regulatory frameworks to streamline the compliance and procurement processes for government agencies.

There's also new AI and machine learning ("ML") service that include:

• Amazon Bedrock generative AI: A fully managed generative AI service, Amazon Bedrock delivers secure access to a range of powerful foundation models. It also features safeguards such as guardrails and content filtering to ensure responsible AI use, while also encrypting all data.

• Amazon Q AI assistant: A business-focused chatbot, Amazon Q, assists government employees by summarizing documents, answering questions based on internal knowledge bases, and assisting with a variety of tasks.

• Amazon SageMaker ML model development: Amazon SageMaker offers a secure environment for agencies to build, train, and deploy custom machine-learning models. Features like SageMaker Clarify even help detect and mitigate bias in AI applications.

• Specialized AI services: AWS also houses specialized AI services to enhance interactions with citizens (Amazon Connect cloud-based contact center) and automate intelligent document processing to cut down on manual labor (Amazon Textract).

As you can see, AWS government cloud and AI services put a wide array of tools into the hands of government agencies and their employees. Here's how they make a day-to-day impact:

• Improved support for American citizens: Amazon Bedrock and Amazon Connect employ automated AI chatbots to deliver accurate, real-time information and personalized support to the public. These services cut down wait times and improve engagement.

• Increased operational efficiency: The U.S. Navy Reserve deployed an AWS generative AI chatbot to help reservists find critical information faster, reducing the number of support calls.

• Advanced threat detection: AI can be used by government agencies to detect suspicious patterns within large datasets. The U.S. intelligence and defense communities already use AWS and its partners to analyze troves of data quickly and efficiently, which enhances national security.

• Predictive maintenance: The U.S. Air Force uses AWS' AI and data analytics to monitor equipment and predict potential failures. This drastically reduces downtime and minimizes aircraft maintenance costs.

Now armed with $1 billion in AWS credits, the United States government has the means to update their infrastructure and take advantage of the many efficiencies AI cloud services have to offer.

So, what does this mean for Amazon's business and the stock?

What the Deal Means for Amazon Going Forward

As with any agreement, there are risks and potential downsides to the AWS OneGov deal... for both the government and Amazon.

Amazon agreed to this deal knowing it was going to create pressure on their cloud services. After all, it's virtually impossible not to lower gross and net margins when you're giving your client a $1 billion discount. For Amazon, however, it's a comparatively small price to pay to achieve the big picture result... larger market share and the U.S. government as a customer. The OneGov deal ensures AWS an enormous customer base spanning hundreds of government agencies.

And once those agencies lock in with AWS, Amazon's strategy bets on those agencies staying within its ecosystem and giving AWS a steady stream of business in the future. Once that billion-dollar gift card balance hits zero, of course. Yes, Amazon's margins will suffer in the short term... but being a "loss leader" is part of the plan.

The AWS OneGov deal immediately positions Amazon as a government catalyst as AWS overhauls the federal government's IT infrastructure. With AWS' cloud and AI services providing the government with an accelerated digital transformation, this agreement is a huge instant win for the U.S. government... and likely a long-term victory for Amazon.

But keep in mind, these long-term benefits for Amazon are likely to be just that... long-term. And so, it's worth having a look at the stock and its near-term prospects. And our proprietary Stansberry Score is a great place to start.

AMZN gets solid marks for financials. Capital efficiency is on the lower side. But remember that this score is for Amazon as a whole, not just AWS. And Amazon's biggest revenue segment is its online retail platform, which has notoriously thin margins. For a company like this, the name of the game is scale – and Amazon has that in spades.

The stock also gets a lower grade for valuation. No valuation metric is perfect, but at approximately 33.5 times trailing earnings, AMZN trades at a premium to the broader market. Then again, it's very rare to see a company of Amazon's caliber trade at a steep discount. All in all, the company earns a respectable B grade.

As for growth...

Analysts are calling for 2025 earnings per share ("EPS") of $6.67, that would represent 20% growth over 2024. Estimates for 2027 EPS are in the neighborhood of $7.60, which, if accurate, would be 14% bottom-line growth year over year.

Put simply, Amazon's business is chugging along nicely. And the prospect of securing government agencies as long-term customers with AWS bodes well for the business. At the very least, AMZN is a stock worthy of a watch list in the event of any market-wide sell-offs.

And if you are interested in Amazon and its future prospects, there's one more thing you should know.

The Amazon 'Helios Project'

Let's start with the "Amazon Helios" project. If you're unfamiliar, my colleague Steven Longenecker wrote an outstanding piece detailing the initiative, "What Is the 'Amazon Helios' Project?"

In short, Amazon Helios is a groundbreaking advancement in nuclear fusion energy. And it has been labeled "the most exciting human discovery since fire." As Steven notes in his article, "Helios is all about nuclear fusion – a way to produce energy by fusing atoms, like the sun. If successful, it promises virtually limitless, zero-emission power without the long-lived radioactive waste of today's nuclear plants. In practical terms, that could one day mean ultra-cheap electricity for our homes and businesses."

And in Steven's words, "think of Helios as a foundation for countless other innovations, much like how the invention of electricity paved the way for the modern world."

It's a potential life changer. As in...

• Infinite clean energy at our fingertips

• A $40 trillion global market

• A ripple effect that will transform countless industries

This is huge for Amazon. But fusion energy is still in its infancy, so it's far from a sure thing today. There are still important engineering challenges to overcome in order to build a dependable, consistently operational power plant. We could be looking at five, 10, even 20 years before a fusion power plant gets built. Not to mention the time it might take to adopt fusion energy. But it is coming...

And AWS will be a significant part of its adoption.

Here's an early look at how Amazon's biggest profit stream may work in tandem with its boldest venture yet...

• With its innovative cloud computing and AI services, AWS provides the tools researchers and engineers need to accelerate nuclear fusion research and technology.

• Scientists have already used AWS services for complicated simulations and to optimize reactor designs. Fusion energy company Commonwealth Fusion Systems used AWS cloud solutions to significantly cut down computation time... from 56 days to three days.

• Other nuclear energy facilities – including the Idaho National Laboratory and Lawrence Livermore National Laboratory – work with AWS to create AI systems for real-time troubleshooting and diagnostics.

• With data centers requiring so much energy to operate, Amazon aims to harness massive amounts of clean energy to power its expanding operations. AWS' AI solutions will play an integral role.

The Helios project certainly presents an exciting early investment opportunity... and its upside is potentially life changing. In tandem with market leader AWS, this initiative could redefine AMZN. But there are risks, especially during these preliminary stages. Wall Street veteran Whitney Tilson is optimistic... but he also urges caution.

But if you'd like to get more of the details for yourself, you can go right here.

Regards,

David Engle