Amazon's third-quarter earnings report revealed a clear two-sided picture: core operating profit beat expectations and the closely watched cloud computing unit AWS maintained rapid growth, yet the core e-commerce business showed sluggish growth, total revenue and EPS both fell short of Wall Street forecasts, and AI-related capital expenditure remained at elevated levels, intensifying market concerns about free cash flow and the payback period on investment.

After the bell on Thursday, October 29, Eastern Time, Amazon.com Inc (NASDAQ: AMZN) reported that for its fiscal third quarter ended September 30, 2026, net sales rose 12% year-over-year to $201.94 billion, slightly below analysts' expectations of roughly $202.26 billion; diluted earnings per share (EPS) declined approximately 3.1% year-over-year to $1.89, while analysts had expected a modest 0.5% increase to $1.96; operating income surged 61.5% year-over-year to $28.08 billion, beating market expectations by more than 7%, with the operating margin climbing to 13.9%, the highest level in the company's history.

The biggest highlight of the report remained AWS. Third-quarter AWS net sales jumped 39.3% year-over-year to $45.98 billion, about 1.3% above analyst estimates, marking the fastest single-quarter growth in nearly five years. The annualized revenue run rate at quarter-end reached $184 billion, up 8.9% from the end of the second quarter. CEO Andy Jassy emphasized in the earnings release that AWS investments in features and infrastructure are paying off, and he projected that AWS revenue growth would exceed 40% in both 2027 and 2028.

Compared with AWS, third-quarter online sales grew only 2% year-over-year, the slowest single-quarter pace since early 2023. Amazon's guidance midpoint for holiday-season and fourth-quarter sales also fell short of analyst expectations, suggesting its online business may struggle to stage a quick recovery in the near term.

Although AWS revenue continued to surge, the market was more focused on the "price tag." Amazon's third-quarter capital expenditure on property and equipment reached $77.26 billion, roughly 1.2 times the year-ago figure 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 a year earlier to an outflow of $42.36 billion, with the outflow far exceeding the second quarter. The company also maintained its full-year 2026 cash capital expenditure guidance of approximately $220 billion unchanged, sending no signal of slowing AI investment.

Following the earnings release, Amazon.com Inc (NASDAQ: AMZN) shares, which had already closed down more than 4% on Thursday, tumbled further in after-hours trading, at one point dropping more than 10%.

Revenue Slightly Below Expectations, but Operating Margin Hits Record High

On the top line, Amazon's third-quarter net sales came in at $201.94 billion, up 12% year-over-year, or 13% excluding currency effects.

Amazon specifically noted that Prime Day in most of its key markets was moved up to the second quarter this year, whereas in 2025 Prime Day fell entirely in the third quarter, meaning this year's third-quarter year-over-year growth was affected by this timing shift. Excluding this factor, third-quarter revenue growth would have been approximately 400 basis points higher.

On the profit side, results were notably stronger. Third-quarter operating income was $28.08 billion, surging 61% from $17.42 billion a year earlier, with the operating margin rising from 9.7% to 13.9%. This means that even with revenue slightly below expectations, efficiency improvements in fulfillment, sales and marketing, and administrative expenses still supported a record operating margin.

Net income was $20.69 billion, below the $21.19 billion reported a year earlier; diluted EPS was $1.89, down 3% year-over-year. This decline was largely attributable to a high non-operating base in the prior-year period. In the third quarter of 2025, Amazon.com Inc (NASDAQ: AMZN) recognized a $9.5 billion pre-tax gain from its Anthropic investment, with no comparable gain this year, and the other income/expense line swung from a positive $10.19 billion a year earlier to a negative $700 million.

In other words, this earnings report did not reflect an operational profit stall, but rather revenue and EPS slightly missing expectations, compounded by non-operating items and capital expenditure pressures, which undermined investor confidence in near-term returns.

AWS Keeps Accelerating: AI Demand Supports Cloud Business, but Questions About Returns Mount

AWS was the standout business line in the third quarter. The segment posted net sales of $45.98 billion, up 39% year-over-year, above analyst estimates of roughly $45.4 billion. This represents a further acceleration from approximately 37% growth in the second quarter and continues to mark the fastest pace since the fourth quarter of 2021. AWS operating income was $17.77 billion, up 55% year-over-year, with an operating margin of 38.7%, up from 34.6% a year earlier.

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

The earnings release 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. Bedrock AgentCore already has tens of thousands of customers using it, with the number of agents deployed in the third quarter more than double the total of the previous three quarters combined.

Jassy's outlook for AWS was highly aggressive. He stated that AWS's third-quarter annualized revenue run rate had reached $184 billion and projected that AWS revenue growth would exceed 40% in both 2027 and 2028. He also said that no company in history has ever achieved a trillion-dollar revenue scale, and that Amazon.com Inc (NASDAQ: AMZN) could potentially have two such businesses within the next 5 to 10 years.

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

AI Capital Expenditure Becomes the Core Pressure on the Stock: Free Cash Flow Turns Sharply Negative

Capital expenditure was the key trigger for the negative market reaction to this earnings report.

In the third quarter, Amazon's spending on property and equipment was $77.26 billion, far above the $35.1 billion from a year earlier and well exceeding the market expectation of $57.47 billion. Over the trailing twelve months, the company's net purchases of property and equipment reached $210.66 billion, up 82% year-over-year. Amazon.com Inc (NASDAQ: AMZN) explicitly stated that this increase primarily reflects AI-related investments.

The cash flow statement showed that over the trailing twelve months, Amazon's operating cash flow was $168.3 billion, up 29% year-over-year. However, free cash flow was an outflow of $42.36 billion, roughly 5.6 times the $7.6 billion outflow in the second quarter, compared with an inflow of $14.79 billion a year earlier. In other words, the company's core business cash generation is still strengthening, but AI infrastructure investment is moving faster, having consumed and reversed free cash flow.

The balance sheet also reflects expansion pressures. As of the end of the third quarter, Amazon's cash and cash equivalents stood at $55.78 billion, down from $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 alone, the company added $48.1 billion in new long-term debt financing, bringing the total for the first three quarters to $115.1 billion.

For growth-oriented technology companies, capital expenditure itself is not inherently negative, especially against the backdrop of AWS growth re-accelerating. However, when third-quarter capital expenditure significantly exceeds expectations, free cash flow turns notably negative, and the company simultaneously maintains its full-year cash capital expenditure guidance of approximately $220 billion, the market will naturally worry: when will AI investment enter its payback period? Will it continue to squeeze cash flow in the coming years?

North America and International Businesses: Revenue Affected by Prime Day Timing, Profitability Improves Notably

Retail-related businesses showed lackluster growth on the surface, but profitability improvements were relatively pronounced.

North America segment third-quarter net sales were $112.85 billion, up 6% year-over-year, slightly below market expectations of approximately $113.39 billion. Operating income was $8.72 billion, surging 82% from $4.79 billion a year earlier, with the operating margin rising from 4.5% to 7.7%.

International segment net sales were $43.11 billion, up 5% year-over-year, also slightly below expectations; excluding currency effects, growth was 8%. The segment's operating income was $1.58 billion, above the $1.2 billion from a year earlier, with the operating margin rising from 2.9% to 3.7%.

Amazon.com Inc (NASDAQ: AMZN) explained that the shift in Prime Day timing depressed third-quarter revenue growth. Online store revenue was $68.47 billion, up only 2% year-over-year; third-party seller services revenue was $46.49 billion, up 9% year-over-year; physical store revenue was $5.71 billion, up 2% year-over-year. Global paid units grew 12% year-over-year, and global shipping costs rose 11% year-over-year, indicating that order volumes are still growing but the revenue mix was affected by promotional timing.

Therefore, the retail business cannot simply be interpreted as deteriorating demand. More accurately, third-quarter retail revenue underperformed market expectations, but margin improvements and delivery efficiency gains continued. The company said Prime members received their orders faster than ever during the third quarter, with more than 1.5 billion items delivered same-day or next-day.

Advertising Growth Slows, Another Weak Spot in the Earnings Report

The advertising business underperformed in the third quarter, making it another factor weighing on sentiment besides capital expenditure.

Amazon's advertising services revenue grew 11% year-over-year to $19.64 billion, about 6% below analyst expectations of $20.87 billion; excluding currency effects, growth was 12%. This pace represents a marked slowdown from the 20%-plus growth seen in multiple previous quarters and also fell short of market expectations of approximately $20.87 billion.

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

Nevertheless, the market will inevitably be more sensitive in the short term. Advertising is one of Amazon's higher-margin, faster-growing businesses in recent years, and any slowdown in growth will weaken investor confidence in the monetization capabilities of its retail ecosystem. By contrast, subscription services performed more steadily, with third-quarter revenue of $14.01 billion, up 11% year-over-year, above market expectations of approximately $13.69 billion.

Q4 Guidance Not Bad, but Revenue and Profit Midpoints Below Expectations

Amazon's fourth-quarter guidance was broadly in line with Wall Street expectations but did not deliver enough of a positive surprise.

The company expects fourth-quarter net sales between $240 billion and $247 billion, representing 12% to 16% year-over-year growth, including approximately 60 basis points of unfavorable currency impact. The midpoint of this revenue range is $243.5 billion, slightly below analyst expectations of $244.52 billion, though the expected figure falls within the guidance range.

More critically, the operating income guidance. Amazon.com Inc (NASDAQ: AMZN) expects fourth-quarter operating income of $28.5 billion to $33.5 billion, while the market expected approximately $33.1 billion. In other words, the upper end of the company's guidance is only slightly above consensus, while the midpoint of $31 billion is below expectations.

This explains why the stock reaction was so severe: third-quarter revenue and EPS both slightly missed expectations, advertising revenue fell short, the fourth-quarter profit guidance midpoint was weak, and capital expenditure significantly exceeded expectations while the full-year AI investment plan remained at elevated levels. AWS's strong growth and record operating margin are highlights of the report, but in the current market environment, investors are more focused on whether AI investment will continue to suppress free cash flow and whether high capital expenditure can translate into sufficiently high profits and cash returns within a visible cycle.