Amazon Q3 Earnings: AWS Revenue Up 39.3%, AI Capital Expenditures Turn Free Cash Flow Negative

Amazon's third-quarter earnings present a clear two-sided picture: core operating profit came in stronger than expected, and the closely watched cloud computing business AWS maintained rapid growth, but growth in the core e-commerce business was weak, the company's total revenue and EPS both fell short of Wall Street expectations, and AI-related capital expenditure remained at a high level, intensifying market concerns about free cash flow and the investment return cycle.

After the U.S. market close on Thursday, October 29, Eastern Time, Amazon reported that for the third quarter of this year ended September 30, 2026, net sales rose 12% year over year to $201.94 billion, slightly below analysts' expectation of about $202.26 billion; diluted earnings per share (EPS) fell about 3.1% year over year to $1.89, while analysts expected a slight increase of 0.5% to $1.96; and operating profit rose 61.5% year over year to $28.08 billion, more than 7% above market expectations, with the operating margin rising to 13.9%, the highest level in the company's history.

The biggest highlight of the earnings report remains AWS. In the third quarter, AWS net sales rose 39.3% year over year to $45.98 billion, 1.3% above analysts' expectations, marking the highest single-quarter growth rate in nearly five years, with an annualized revenue run rate of $184 billion at the end of the quarter, up 8.9% from the end of the second quarter. CEO Andy Jassy emphasized in the earnings report that AWS's investments in features and infrastructure are paying off, and he expects AWS revenue growth to exceed 40% in both 2027 and 2028.

Compared with AWS, online sales in the third quarter grew only 2% year over year, the lowest single-quarter growth rate since early 2023. Amazon's guidance for holiday-season and fourth-quarter sales, whose midpoint fell short of analysts' expectations, also suggests that its online business may find it difficult to recover quickly in the near term.

Although AWS revenue continued to surge, the market is more focused on the "cost." Amazon's capital expenditure on purchases of property and equipment in the third quarter reached $77.26 billion, about 1.2 times the year-earlier level and more than 34% above market expectations; free cash flow was negative for the second consecutive quarter, swinging from an inflow of $14.79 billion in the year-earlier period to an outflow of $42.36 billion, far exceeding the outflow in the second quarter. The company also maintained its full-year 2026 cash capital expenditure guidance of about $220 billion unchanged and did not signal any slowdown in AI investment.

After the earnings release, Amazon's stock, which had already closed down more than 4% on Thursday, fell further in after-hours trading, with the after-hours decline at one point exceeding 10%.

Revenue slightly below expectations, but operating margin hits a record high

In terms of overall revenue, Amazon's third-quarter net sales were $201.94 billion, up 12% year over year; excluding the impact of exchange rates, growth was 13%.

Amazon specifically noted that this year Prime Day was moved forward to the second quarter in most of the company's key markets, whereas in 2025 Prime Day fell entirely in the third quarter, so this year's third-quarter year-over-year growth rate was affected by the timing shift; excluding this factor, third-quarter revenue growth would have been about 400 basis points higher.

The profit side was clearly stronger. Amazon's third-quarter operating profit was $28.08 billion, surging 61% from $17.42 billion a year earlier, with the operating margin rising from 9.7% a year earlier to 13.9%. This means that even with revenue slightly below expectations, the company's efficiency improvements in fulfillment, sales and marketing, and administrative expenses still supported a record operating margin.

Net income was $20.69 billion, below $21.19 billion a year earlier; diluted EPS was $1.89, down 3% year over year. This year-over-year decline was largely related to a high non-operating base in the year-earlier period—in the third quarter of 2025, Amazon recognized a $9.5 billion pre-tax gain on its Anthropic investment, while there was no similar gain in the same period this year, with other income/expense items swinging from positive $10.19 billion a year earlier to negative $700 million.

In other words, this earnings report does not reflect a profit slowdown at the operating level; rather, revenue and EPS slightly below expectations, combined with pressure from non-operating items and capital expenditure, weakened investors' confidence in short-term returns.

AWS continues to accelerate: AI demand supports the cloud business, but the market is also questioning the return on investment

AWS was the brightest business line in the third quarter. The segment's net sales were $45.98 billion, up 39% year over year, above analysts' expectation of about $45.4 billion, with the year-over-year growth rate further accelerating from about 37% in the second quarter and continuing to set the highest growth rate since the fourth quarter of 2021; AWS operating profit was $17.77 billion, up 55% year over year, with an operating margin of 38.7%, above 34.6% a year earlier.

In terms of revenue structure, third-quarter online sales were $68.5 billion, contributing one-third of Amazon's net sales, while AWS sales accounted for 23% of the total, up from 18% a year earlier, but contributed about 63% of Amazon's overall operating profit. This shows that Amazon's profit pool remains highly dependent on the cloud business, and AWS's re-acceleration is crucial to supporting the group's valuation.

The earnings report disclosed that AWS recently signed new agreements with Meta, Nvidia, OpenAI, Salesforce, Oracle, Qualcomm, Verizon and others. Amazon Bedrock continued to grow rapidly, with Fortune 500 companies' spending on Bedrock nearly 7 times higher year over year, and overall token volume up nearly 17 times year over year; Bedrock AgentCore is already used by tens of thousands of customers, and the number of agents deployed in the third quarter was more than twice the total of the previous three quarters combined.

Jassy's statements about AWS's prospects were also very aggressive. He said AWS's third-quarter annualized revenue run rate had reached $184 billion, and he expects AWS revenue growth to exceed 40% in both 2027 and 2028. He also said that historically there has never been a company with a trillion-dollar revenue scale, and that Amazon may have two such businesses in the next 5 to 10 years.

But this is also where the market is divided: AWS's growth shows that AI investment is being converted into demand, but high growth simultaneously requires massive computing power, data center and chip investment. Investors are not denying AWS's recovery; rather, they are reassessing how much cash flow this growth will consume.

Capital expenditure is the key reason this earnings report triggered a negative market reaction.

In the third quarter, Amazon's spending on purchases of property and equipment was $77.26 billion, far above $35.1 billion in the same period last year and well above the market expectation of $57.47 billion. Over the past 12 months, the company's net purchases of property and equipment reached $210.66 billion, up 82% year over year. Amazon explicitly stated that this increase mainly reflects AI-related investment.

The cash flow statement shows that over the past 12 months Amazon's operating cash flow was $168.3 billion, up 29% year over year; but free cash flow was an outflow of $42.36 billion, about 5.6 times the $7.6 billion outflow in the second quarter, compared with an inflow of $14.79 billion in the same period last year. In other words, the company's main business is still strengthening its ability to generate cash, but AI infrastructure investment is proceeding faster and has already swallowed and reversed free cash flow.

The balance sheet also reflects expansion pressure. As of the end of the third quarter, Amazon's cash and cash equivalents were $55.78 billion, lower than $86.81 billion at the end of last year; long-term debt rose to $173.13 billion, compared with $65.65 billion at the end of last year. In the third quarter, the company added $48.1 billion in new long-term debt financing, and in the first three quarters it added $115.1 billion in new long-term debt financing.

For growth technology companies, capital expenditure itself is not negative, especially against the backdrop of AWS's growth rate turning upward again. But when third-quarter capital expenditure greatly exceeded expectations, free cash flow turned significantly negative, and the company also maintained its full-year cash capital expenditure forecast of about $220 billion, the market will naturally worry: when will AI investment enter the payback period? Will it continue to squeeze cash flow in the coming years?

North America and international businesses: revenue affected by Prime Day timing, profit improvement obvious

Retail-related businesses appear to have modest growth on the surface, but profit improvement is relatively obvious.

North America business third-quarter net sales were $112.85 billion, up 6% year over year, slightly below the market expectation of about $113.39 billion; operating income was $8.72 billion, up 82% from $4.79 billion in the same period last year, and operating margin rose from 4.5% to 7.7%.

International business net sales were $43.11 billion, up 5% year over year, also slightly below expectations; excluding the impact of exchange rates, growth was 8%. The segment's operating income was $1.58 billion, above $1.2 billion in the same period last year, and operating margin rose from 2.9% to 3.7%.

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Therefore, the retail business cannot simply be understood as deteriorating demand. More accurately, third-quarter retail revenue performance was weaker than market expectations, but margin improvement and delivery efficiency gains continued. The company said Prime members received packages faster in the third quarter than in any prior comparable period, with more than 1.5 billion items delivered same-day or next-day.

Slowing advertising growth is another weak spot in the earnings report

Advertising business performance in the third quarter was below expectations, another factor besides capital expenditure that weighed on sentiment.

Amazon advertising services revenue grew 11% year over year to $19.64 billion, about 6% below analysts' expectation of $20.87 billion; excluding the impact of exchange rates, growth was 12%. This growth rate has slowed markedly compared with growth of more than 20% in several previous quarters, and is also below the market expectation of about $20.87 billion.

The company said advertising revenue was affected by the timing of Prime Day and several other timing factors, and expects fourth-quarter advertising revenue growth to rebound to the high-teens range year over year. If this guidance is met, the third-quarter advertising slowdown may be more of a timing disturbance than a structural slowdown in the advertising business.

However, the market will inevitably be more sensitive in the short term. Advertising is one of Amazon's higher-margin and faster-growing businesses in recent years, and once growth slows, it will weaken investors' confidence in the monetization capability of the retail ecosystem. By comparison, subscription services performed more steadily, with third-quarter revenue of $14.01 billion, up 11% year over year, above the market expectation of about $13.69 billion.

Fourth-quarter guidance is not bad, but the midpoint of revenue and profit is below expectations

Amazon's fourth-quarter guidance is generally near Wall Street expectations, but it did not bring enough surprise.

The company expects fourth-quarter net sales of between $240 billion and $247 billion, up 12% to 16% year over year, including an unfavorable exchange rate impact of about 60 basis points. The midpoint of this revenue range is $243.5 billion, slightly below analysts' expectation of $244.52 billion, but the expected value falls within the guidance range.

More critical is the operating income guidance. Amazon expects fourth-quarter operating income of $28.5 billion to $33.5 billion, while the market expects about $33.1 billion. In other words, the upper end of the company's guidance is only slightly above consensus expectations, while the midpoint of $31 billion is below expectations.

This explains why the stock price reaction was so severe: third-quarter revenue and EPS both slightly missed expectations, advertising revenue was below expectations, the midpoint of fourth-quarter profit guidance was weak, and at the same time capital expenditure greatly exceeded expectations and the full-year AI investment plan remained at a high level. AWS's strong growth and record-high operating margin are highlights of the earnings report, but in the current market environment, investors are more focused on whether AI investment will continue to depress free cash flow, and whether high capital expenditure can be converted into sufficiently high profit and cash returns within a visible cycle. Risk disclosure and disclaimer

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