Amazon Q3 Earnings: AWS Revenue Up 39%, AI Investment Drives Second Consecutive Quarter of Negative Free Cash Flow

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After the U.S. market close on Thursday, Amazon's stock price plunged as much as 12%, and as of press time the decline had narrowed to about 7%. Earlier, the company reported disappointing third-quarter results and an expanding free cash flow outflow, reflecting its massive ongoing investment in artificial intelligence (AI).

According to the financial report, here is how the company's Q3 results compared with LSEG's general expectations:

Earnings per share: $1.89, expected $1.96;

Revenue: $201.94 billion, compared with an earlier forecast of $202.31 billion.

The report also showed that operating profit rose 61.5% year over year to $28.08 billion, more than 7% above market expectations, and the operating margin rose to 13.9%, the highest level in the company's history.

Business segments

In the quarter, the cloud computing business became Amazon's most prominent performance highlight. The report showed that Amazon Web Services (AWS) third-quarter revenue reached $45.984 billion, up about 39% from $33.006 billion in the same period last year, the fastest year-over-year growth rate in nearly five years, with an annualized revenue run rate of about $184 billion.

At the same time, AWS operating profit reached $17.773 billion, up about 55% from $11.434 billion in the same period last year; the operating margin rose to 38.7% from 34.6% in the same period last year.

Amazon Chief Executive Officer Andy Jassy also highlighted AWS's accelerating development on the earnings call, saying the company expects revenue growth rates next year and in 2028 to "exceed 40%." He added: "Our investments in AWS capabilities and infrastructure are paying off."

"We have always believed AWS could become a business with hundreds of billions of dollars in revenue, and now we believe it will be at least double that number, and very likely eventually become our trillion-dollar annual revenue business," he added.

Amazon is facing pressure from Wall Street to prove that artificial intelligence investments are boosting revenue. The company noted growing market demand for AWS's generative AI service Amazon Bedrock, as well as the Trainium and Graviton artificial intelligence chips.

Jassy said Amazon's chip business "continues to maintain triple-digit growth rates every year." He also added that the company plans to launch its Trainium chips to the external market by "the end of 2027," consistent with the timing he hinted at earlier this year.

Although the AWS business continued to thrive, the performance of Amazon's retail business (still its highest-revenue segment) and advertising business was less than satisfactory.

The report showed that online sales rose 2% year over year to $68.47 billion, below analysts' forecast of $69.68 billion. This was slower than the nearly 10% increase a year earlier; advertising revenue rose 11% year over year to $19.64 billion. That figure was below the $20.82 billion that analysts had generally expected.

Both segments were affected by Amazon's decision to move the annual Prime Day promotional event in some countries from the usual third quarter to the second quarter to avoid a clash with the FIFA World Cup in July.

The capital expenditure issue was the main reason for investors' disappointment. Amazon's aggressive investment in artificial intelligence has severely eroded its cash flow. The company posted a free cash flow outflow for the second consecutive quarter, with cash outflow over the past 12 months reaching as high as $42.4 billion. In the previous quarter, the company reported free cash flow of -$7.6 billion.

The company made clear that the funding gap was mainly due to increased purchases of property and equipment driven by artificial intelligence investment.

The report showed that in the third quarter, Amazon's spending on purchases of property and equipment was $77.26 billion, far higher than $35.1 billion in the same period last year and far exceeding the market expectation of $58.7 billion. Over the past 12 months, the company's net purchases of property and equipment reached $210.66 billion, up 82% year over year.

Based on the company's disclosed free cash flow calculation method, namely cash flow from operating activities minus net cash spending on purchases of property and equipment, third-quarter free cash flow was approximately negative $33.456 billion.

In addition, Amazon kept its forecast for 2026 capital expenditure unchanged, saying it still expects spending this year to reach $220 billion. Jassy further said on the earnings call that the company expects "a significant increase in spending in 2027," and that Amazon is "on track to earn substantial financial returns."

Business outlook

Looking ahead to the fourth quarter of 2026, Amazon expects net revenue to be between $240 billion and $247 billion, up 12% to 16% year over year. LSEG data showed that the midpoint of Amazon's forecast was below Wall Street's earlier estimate of $244.5 billion. As it coincides with the peak holiday shopping season, the fourth quarter is usually one of Amazon's highest-revenue quarters. The company said the revenue guidance is expected to include an unfavorable foreign exchange impact of about 0.6 percentage points.

In terms of profitability, Amazon expects fourth-quarter operating profit of $28.5 billion to $33.5 billion, higher than $25 billion in the same period last year, but the market expected about $33.1 billion.

Amazon said future performance may still be affected by factors such as the global economic environment, foreign exchange rates, energy prices, trade policy, supply chains and changes in customer demand. Jassy noted that as AWS cloud computing and artificial intelligence businesses continue to expand and retail business margins continue to improve, the company is seizing long-term growth opportunities across multiple business areas.

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