Amazon's stock fell about 7% after its Q3 earnings report, showing AI investment pressure alongside Alphabet

Amazon's cloud computing business accelerated for a sixth consecutive quarter, but that could hardly mask the weakness at the core of its e-commerce business—Amazon is going through a market test similar to the one Google faces.

Third-quarter results showed that Amazon's total revenue rose 12% year over year to $201.9 billion, below analyst expectations. AWS revenue growth accelerated for a sixth consecutive quarter, but online retail sales growth fell to a three-year low, and advertising growth also hit its lowest level on record. Meanwhile, third-quarter spending on equipment and property exceeded $77 billion, far above market expectations, and free cash flow over the past 12 months came in at negative $42.4 billion.

After the results were released, Amazon shares fell about 7% in after-hours trading; the stock had gained about 5.6% so far this year. The decline closely resembles what happened to Alphabet over the same period—the latter plunged 13% at Thursday's close after search and advertising revenue fell short of expectations, marking its largest single-day drop ever.

AWS accelerates, but Microsoft has raised the bar for "beating expectations"

AWS third-quarter revenue rose 39% year over year to $46 billion, up from 37% growth in the previous quarter and marking a sixth consecutive quarter of acceleration. CEO Andy Jassy said on the earnings call that AWS's core compute and storage rental business is growing at "the fastest pace in several years," and he expects AWS to achieve year-over-year growth of more than 40% in each of the next two years.

Part of AWS's growth is benefiting from demand from AI companies such as OpenAI and Anthropic—both rely on Amazon servers to run their models. Jassy also disclosed that the company's in-house AI chip Trainium will begin selling to external customers by the end of 2027.

However, AWS's strong performance did not fully reassure the market. Emarketer analyst Sky Canaves said: "AWS's accelerating growth failed to meet inflated expectations, and it also failed to surpass the higher competitive bar set by Microsoft and Google. The improvement in cloud operating margin is a positive signal, but it may not be enough to dispel concerns about the sharp rise in capital expenditure and the resulting sharp drop in free cash flow."

By contrast, Microsoft reported 48% cloud revenue growth the same day while keeping capital spending restrained, and its shares fell less than 1% on Thursday.

E-commerce growth at a three-year low, and the Prime Day timing shift is partly to blame

Online sales rose just 2% in the third quarter to $68.5 billion, the slowest growth since early 2023. Amazon attributed part of this to the timing shift of its Prime Day shopping event—this year Prime Day in most major markets moved from the third quarter to the second quarter, so the related sales revenue was not counted in this quarter.

M Science analyst John Tomlinson believes the relative weakness on the retail side is "to some extent" related to the Prime Day timing shift, but he also noted: "There are a few cracks appearing here. The market is paying very close attention to the scale of AI spending at each company."

Sky Canaves further noted that the Prime Day timing shift "does not fully explain the weakness in online store and advertising growth, which suggests consumer pressure may be becoming more evident—consumers are starting to pull back where they can, and that has a knock-on effect on advertisers' willingness to spend."

In advertising, third-quarter revenue rose 11%, the slowest growth since Amazon began disclosing the figure separately in 2020. By comparison, from the second quarter of 2025 to the second quarter of 2026, Amazon's advertising business grew more than 20% every quarter.

Capital spending surges, free cash flow turns deeply negative

Amazon spent more than $77 billion on equipment and property in the third quarter, far exceeding analyst expectations. Free cash flow over the past 12 months came in at negative $42.4 billion, compared with positive $14.8 billion a year earlier—a reversal mainly driven by a $94.8 billion year-over-year increase in property and equipment purchases over the same period.

The company maintained its July forecast of about $220 billion in capital expenditure for 2026, but Jassy said on the call that capital spending in 2027 will increase "substantially" further.

Fourth-quarter guidance below expectations, consumer concerns surface

Amazon expects fourth-quarter (holiday shopping season) revenue of between $240 billion and $247 billion; analysts had expected $244.5 billion on average, and the midpoint of the guidance is slightly below expectations. Fourth-quarter operating profit guidance is $28.5 billion to $33.5 billion, versus an analyst average of about $33 billion, with the low end of the range clearly below market expectations.

Third-quarter operating profit was $17.8 billion, up from $11.4 billion a year earlier.

Jassy used the call to emphasize the health of the company's core businesses. He noted that grocery and everyday essentials sales approached $250 billion in the 12 months through September, growing three times as fast as overall e-commerce and accounting for about half of all units sold in the third quarter. The Alexa for Shopping chatbot had more than 400 million users over the past 12 months, up from the 350 million disclosed last quarter.

But none of these positive signals reversed the after-hours share decline.

In the same boat as Alphabet, with market sentiment highly synchronized

The market reaction Amazon faced this time clearly echoed Alphabet's situation over the same period. Alphabet's third-quarter report showed search advertising revenue rose 12% year over year to $63.3 billion, below the market's $64.9 billion expectation, and free cash flow came in at negative $9.1 billion; its shares plunged 13% at Thursday's close.

On the call, Alphabet management characterized the lag in monetizing AI search as a deliberate choice, with CEO Sundar Pichai comparing the current phase to the shift to mobile a decade ago: "Just as we did with mobile a decade ago, we're focused on building the best search experience first, and then monetizing it." But the market was not convinced.

The two companies' shared predicament reflects the same market question: AI investment is visibly weighing on core business cash flow and growth, while the timeline for monetization remains unclear. By contrast, Microsoft, with its high cloud growth and relatively restrained capital spending, became one of the few tech giants to satisfy investors this earnings season. Risk disclosure and disclaimer

Markets carry risk, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are appropriate for their particular circumstances. Any investment made on this basis is at the user's own risk.