Amazon’s Record AI Spending Overshadows Accelerating AWS Growth as Shares Slide

Strong Cloud Demand Meets Growing Pressure on Cash Flow

Amazon (AMZN) shares declined Friday after the company’s third-quarter results revealed a widening gap between accelerating cloud growth and the cost of expanding artificial intelligence infrastructure. Amazon Web Services delivered its fastest revenue growth in nearly five years, while consolidated operating income reached a record. Nevertheless, an earnings miss and expectations for even higher capital spending in 2027 weighed on investor sentiment. The market reaction reflected a broader reassessment of Big Tech’s AI investment cycle: Amazon’s substantial spending is supporting cloud expansion and a growing backlog of customer commitments, but investors are increasingly focused on how quickly that investment can translate into sustainable free cash flow.

Key Points

• AWS growth accelerates: Cloud revenue increased 39% to approximately $46 billion, supported by expanding AI demand and a $578 billion backlog.
• AI spending strains cash flow: Amazon reported a record $42.4 billion trailing 12-month free-cash-flow outflow as infrastructure investment accelerated.
• Investors question near-term returns: Record operating profitability was overshadowed by an earnings miss, rising debt, and plans for even greater capital expenditures in 2027.

Amazon Delivers Record Operating Profit as AWS Growth Accelerates

Amazon reported third-quarter revenue of approximately $201.9 billion, an increase of 12% from a year earlier. Although sales were broadly consistent with the company’s guidance, they fell slightly below Wall Street expectations. GAAP earnings of $1.89 per share also missed the $1.97 FactSet consensus. Operating performance was considerably stronger. Operating income rose 61% to $28.1 billion, producing a record operating margin of 13.9%. The year-over-year net-income comparison was affected by substantial investment gains related to Anthropic in the prior-year period.

AWS remained the principal growth engine. Revenue increased 39.3% to approximately $46 billion, marking its sixth consecutive quarter of accelerating growth. Cloud operating income reached $17.8 billion, while operating margin improved from 34.6% a year earlier to 38.7%. Demand visibility also strengthened: AWS backlog reached $578 billion, an increase of approximately $82 billion from the preceding quarter. The backlog represents contracted business that has not yet been recognized as revenue, providing an indication of future demand without guaranteeing the timing of revenue recognition.

Chief Executive Andy Jassy said Amazon expects AWS revenue growth to exceed 40% in both 2027 and 2028. He also outlined a longer-term ambition for AWS to become a trillion-dollar annual revenue business within five to ten years. AI services are contributing to that expansion. Inference, the process of running trained AI models to generate responses and predictions, now accounts for well over half of AWS AI revenue. Usage of Amazon Bedrock, the company’s platform for building AI applications, has also increased sharply, with token volume growing nearly seventeenfold.

However, the growing mix of AI workloads presents a profitability challenge. These services can carry lower margins than traditional cloud computing, particularly as hardware costs rise and new infrastructure is brought online. Amazon’s custom Trainium chips and infrastructure ownership offer potential cost advantages, but management has not provided corresponding long-term AWS margin guidance.

Why Is Amazon Stock Falling Despite Strong Cloud Growth?

Amazon’s stock decline reflects concerns that rapid infrastructure investment is consuming cash faster than the company’s expanding businesses can generate it. Free cash flow, the money remaining after operating expenses and capital investment, fell to a negative $42.4 billion over the twelve months ending in September. That compares with positive free cash flow of $14.8 billion a year earlier and represents the largest trailing annual outflow in Amazon’s history.

The deterioration was driven by capital spending rather than declining operating cash generation. Trailing operating cash flow increased 29% to $168.3 billion, but net capital purchases reached approximately $210.7 billion. During the third quarter alone, Amazon spent roughly $76 billion on capital expenditures, more than double the amount recorded a year earlier. The company continues to expect approximately $220 billion in capital expenditures for 2026, largely directed toward AWS and AI infrastructure. Jassy also indicated that spending will increase meaningfully in 2027, emphasizing the need to expand computing capacity while demand remains strong.

The investment program is changing Amazon’s financial position. Long-term debt climbed to approximately $173 billion at the end of September from roughly $66 billion at the end of 2025, while cash balances declined. Quarterly interest expense more than tripled to $1.69 billion, adding financing costs alongside the company’s infrastructure commitments. Credit markets have also responded: the cost of insuring Amazon’s debt against default through five-year credit default swaps has increased substantially since August, reflecting greater perceived credit risk as borrowing expands.

Meanwhile, the company’s holiday-quarter outlook offered limited reassurance. Amazon forecast fourth-quarter revenue between $240 billion and $247 billion, compared with analysts’ expectations of approximately $244 billion. Operating income guidance ranged from $28.5 billion to $33.5 billion, with transportation costs and expenses associated with its Amazon Leo satellite initiative affecting near-term profitability. The shares fell approximately 7% in Thursday’s after-hours trading before extending their weakness into Friday’s broader technology selloff. The reaction followed disappointing market responses to earnings from other major AI investors, including Alphabet (GOOGL) and Meta Platforms (META).

AWS Backlog and Retail Efficiency Shape Amazon’s Next Growth Phase

Despite investor concerns about spending, Amazon’s expanding cloud backlog and improving retail operations provide important context for assessing the company’s financial outlook.

Morgan Stanley analyst Brian Nowak characterized the AWS results primarily as an expectations disappointment rather than a deterioration in underlying demand. Although the 39% growth rate fell below his estimate, AWS added approximately $3.8 billion in quarterly revenue, its second-largest sequential increase on record. He also noted that the scale of third-quarter capital spending could signal new data-center openings and equipment deliveries that support future revenue growth.

Amazon’s custom silicon strategy represents another potential growth opportunity. The company plans to begin selling Trainium chips to third-party data centers in late 2027, expanding its AI infrastructure business beyond internally operated AWS facilities. However, external chip sales may produce different economics from deploying the hardware within Amazon’s own cloud network.

The retail business is also showing signs of operating efficiency. Paid units increased 12%, exceeding shipping-cost growth of 8% excluding transportation inflation. Grocery and everyday essentials grew approximately three times faster than the remainder of Amazon’s online store business, reflecting continued demand for frequently purchased products. Advertising revenue reached approximately $19.6 billion, although growth slowed to 12% excluding currency effects. The company attributed part of that slowdown to the earlier timing of Prime Day and expects advertising growth to return to the high teens in the fourth quarter.

Amazon is also expanding its use of AI in retail and advertising. Jassy said more than 400 million customers used Alexa for Shopping during the preceding twelve months, with interactions rising substantially. The company has introduced additional AI tools for advertisers, while maintaining that external shopping agents have not meaningfully affected its advertising business. Together, these developments illustrate the competing forces shaping Amazon’s outlook: cloud demand continues to accelerate, while retail productivity and advertising provide additional earnings support. The challenge is converting that operating momentum into cash generation as the company undertakes its largest infrastructure expansion to date.

What It Means for Investors

Amazon’s earnings reaction highlights an increasingly important distinction in the AI investment cycle: strong revenue growth does not necessarily translate into stronger near-term cash flow. AWS is expanding rapidly, supported by contracted customer demand, increasing AI usage, and management’s expectations for continued acceleration. At the same time, the cost of building data centers, acquiring computing equipment, and financing infrastructure is rising faster than operating cash generation.

The contrast is particularly significant because Amazon’s underlying businesses remain profitable. Record consolidated operating income and improving AWS margins demonstrate that the company continues to generate substantial earnings even as its free cash flow turns negative. The market’s concern centers less on whether AI demand exists and more on the timing and profitability of the investments required to serve it. That concern extends beyond Amazon. Microsoft (MSFT), Alphabet, Meta, and other major technology companies are investing heavily in AI infrastructure, while investors are increasingly scrutinizing capital requirements, financing costs, and the potential returns from expanding computing capacity.

For Amazon, developments worth monitoring include AWS revenue growth relative to its backlog, infrastructure utilization, capital spending, debt levels, and the recovery of free cash flow. Retail efficiency and advertising growth will also influence how effectively the company’s established businesses can support its expanding AI operations.

Conclusion

Amazon’s third-quarter results paired substantial cloud demand and record operating profitability with an unprecedented increase in infrastructure spending. The stock’s decline reflects a shift in investor attention from the scale of AI demand toward the returns generated by the capital required to meet it. Amazon’s expanding backlog and cloud growth expectations provide visibility into future business activity, but the pace of investment, financing costs, and margin pressures remain central uncertainties. The company’s ability to translate accelerating AWS revenue into stronger cash generation will be an important measure of its next phase of growth.

FAQs

Why did Amazon stock fall after its third-quarter earnings?

Amazon shares declined because earnings missed analysts’ expectations, free cash flow turned sharply negative, and management indicated that AI infrastructure spending would increase further in 2027. These concerns outweighed accelerating AWS revenue growth and record operating profitability.

How fast is Amazon Web Services growing?

AWS revenue increased 39.3% year over year to approximately $46 billion in the third quarter. Amazon expects AWS revenue growth to exceed 40% in both 2027 and 2028.

Why is Amazon reporting negative free cash flow?

Amazon’s infrastructure investments have exceeded the cash generated by its operations. The company reported a trailing twelve-month free-cash-flow outflow of $42.4 billion as spending on data centers, computing equipment, and other capital projects accelerated.

How much is Amazon spending on artificial intelligence?

Amazon expects approximately $220 billion in capital expenditures during 2026, largely supporting AWS and AI infrastructure. Management has indicated that spending will increase meaningfully in 2027.

What should investors watch in Amazon’s upcoming results?

Important developments include AWS growth, conversion of backlog into revenue, capital expenditures, operating margins, financing costs, and free cash flow. Retail profitability and advertising growth will also help determine how effectively Amazon supports its infrastructure investments.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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