Amazon recorded its fastest cloud business growth in five years, supported by expanding demand for artificial intelligence (AI), but its shares fell sharply. Although its operating margin also reached a record high, deteriorating cash flow from large-scale AI infrastructure investment and earnings guidance below market expectations weakened investor sentiment.
According to industry sources on October 30, Amazon reported revenue of $201.944 billion in its third-quarter earnings announcement on October 29, local time. Revenue increased 12% year on year but fell slightly short of the market forecast of $202.31 billion. Earnings per share (EPS) of $1.89 also came in below the market estimate of $1.96.
Operating profit increased 61% year on year to $28.076 billion. The operating margin rose from 9.7% in the third quarter of 2025 to a record 13.9% in 2026. Net income declined about 2% to $20.685 billion, affected by the comparison with approximately $9.5 billion in valuation gains related to Amazon's Anthropic investment that were included in the previous year's results.
Despite these earnings improvements, the shares weakened. Amazon closed the regular session down 4.25% at $243.79, then fell about 6% in after-hours trading following the earnings announcement. The article's interpretation is that concerns about the scale of investment and future earnings guidance would have outweighed the benefits of AI investment already reflected in revenue and operating profit.
AWS revenue rises 39% as competition raises market expectations
The most notable performance in the results came from Amazon Web Services (AWS), the company's cloud business.
AWS third-quarter revenue increased 39.3% year on year to $45.984 billion. This was its fastest growth in five years and exceeded the market forecast of $45.48 billion. AWS revenue growth accelerated from 20% in the third quarter of 2025 to 28% in the first quarter of 2026, 37% in the second quarter and 39% in the third quarter.
Profitability also improved. AWS operating profit increased 55% year on year to $17.773 billion. AWS accounted for about 23% of Amazon's total revenue but contributed 63% of operating profit. The article interprets expanding AI infrastructure demand as a factor that would be translating into cloud revenue and profit growth.
However, faster growth at competitors is also raising market expectations for AWS. AWS revenue growth increased by 2 percentage points from the preceding quarter, but Google Cloud's third-quarter revenue more than doubled year on year in 2026. Microsoft is also pursuing Amazon while maintaining strong growth in its cloud business.
Amazon is accelerating customer acquisition by signing new contracts with major technology companies. Meta, OpenAI and Nvidia have signed new AWS contracts, while total token processing volume on Amazon Bedrock, its enterprise generative AI platform, increased approximately 17-fold year on year. Bedrock-related spending by Fortune 500 companies rose approximately sevenfold.
It is also expanding its business scope from infrastructure to enterprise AI services, using its proprietary Trainium AI chips and an AI agent operations platform. As cloud market competition intensifies, acquiring new customers through expanded AI services and increasing usage by existing customers are expected to play important roles in sustaining AWS growth.
Capital expenditure more than doubles as Wall Street watches cash flow and profitability
Despite strong AWS growth, the market is concerned about the burden of capital expenditure. Amazon's third-quarter purchases of property and equipment reached $77.259 billion, more than double the $35.095 billion a year earlier. The figure also significantly exceeded the market estimate of approximately $58.7 billion. This reflected large-scale spending on infrastructure expansion, including AI data centers, servers and chips.
Amazon expects annual cash capital expenditure of approximately $220 billion in 2026. As it rapidly increases investment in data centers and servers to meet companies' AI infrastructure demand, it is spending more on capital investment than it generates in cash from operations.
This investment expansion led to deteriorating free cash flow (FCF). FCF over the preceding 12 months turned negative at $42.357 billion, compared with positive FCF of $14.788 billion in the same period a year earlier. The deficit also widened approximately 5.6-fold from $7.604 billion in the preceding quarter.
Operating cash flow over the same period increased 29% year on year to $168.3 billion. However, net purchases of property and equipment reached $210.7 billion, showing that capital expenditure exceeded cash generated from operations. AWS's operating margin declined slightly from 39.4% in the second quarter of 2026 to 38.7% in the third quarter. Although profitability remains high, the article says the future impact of depreciation and higher operating expenses from large-scale data center investment on margins remains to be seen.
Wall Street is also watching the potential impact of large-scale AI investment on future cash flow and profitability. Ahead of the earnings announcement, UBS said on October 26 that the market was pricing in the possibility of Amazon's 2027 capital expenditure exceeding $300 billion. It explained that concerns about free cash flow remaining near zero or negative in that case could weigh on investor sentiment.
However, UBS also emphasized the possibility that expanded AI infrastructure investment could improve AWS profitability over the long term. UBS analyst Stephen Ju forecast an AWS operating margin of 46% in 2027, above the market estimate of 38%. The assessment was that profitability could improve as operating costs increase relatively slowly compared with AI revenue.
Evercore ISI also expressed concern about the cash-flow burden from Amazon's expanding AI investment. It forecast capital expenditure of $320 billion in 2027 and negative free cash flow of $57 billion.
In an October 26 report, Evercore ISI said, “The financing burden from expanding AI investment could have a greater impact on the share price than near-term earnings,” while assessing that “Amazon has greater capacity than competitors to sustain large-scale capital expenditure.”
Retail and advertising growth slows as fourth-quarter guidance also misses expectations
Slower growth in major businesses outside cloud also affected investor sentiment.
Third-quarter online store revenue increased just 2% year on year to $68.47 billion. Growth slowed sharply from 15% in the preceding quarter. Advertising revenue also rose 11% to $19.637 billion but fell short of the market estimate of $20.82 billion.
However, a change in the timing of Prime Day, the major discount event, contributed to slower e-commerce and advertising growth. The event, held in the third quarter of 2025, was brought forward to the second quarter in major countries in 2026, spreading sales across the periods. Amazon estimated that without this effect, its third-quarter total revenue growth would have been approximately 4 percentage points higher.
Retail profitability, by contrast, improved. North American operating profit increased approximately 82% year on year to $8.723 billion. The article interprets this as an indication that cost-efficiency measures would be delivering results despite slower revenue growth.
Amazon's fourth-quarter earnings guidance also fell short of market expectations. It forecast fourth-quarter revenue of $240 billion to $247 billion. The midpoint of $243.5 billion was below the market estimate of $244.5 billion. Its operating profit guidance of $28.5 billion to $33.5 billion also had a midpoint below the market expectation of approximately $33 billion.
Amazon thus plans to maintain strong AWS growth by expanding AI infrastructure investment. However, as competitors including Microsoft and Google accelerate their efforts in the cloud market, pressure is also increasing to secure profitability and improve cash flow as investment expands. Wall Street views AWS's growth prospects positively but is also watching how future capital expenditure and investment results will affect earnings.
“Investments in AWS capabilities and infrastructure are delivering results, with third-quarter revenue increasing more than 39% year on year,” Amazon CEO Andy Jassy said in the third-quarter earnings announcement. “We expect revenue growth of more than 40% in each of 2027 and 2028 as well.”
Original Korean article: ZDNet Korea
English brief by Korea Wind Intelligence, koreawindintel.com
