Anna Moneymaker

Amazon (Nasdaq: AMZN) reported its third-quarter results for 2026 in the early hours of October 30 Hong Kong time. Operating margin rose to a record 13.9%, while revenue from its cloud business AWS increased 39% year on year to US$45.98 billion, the fastest growth in nearly five years. However, group revenue and earnings per share both came in slightly below market expectations, while quarterly spending on property and equipment reached US$77.26 billion (about HK$600 billion). The shares plunged more than 11% at one point in after-hours trading before paring the decline to about 5% to 6.5%. Amazon shares had already fallen 4.25% during regular trading before the results, closing at US$243.79.

Third-quarter revenue rose 12% year on year to US$201.94 billion, slightly below market estimates of about US$202.2 billion to US$202.3 billion. Earnings per share came in at US$1.89, below the LSEG consensus estimate of US$1.96. Operating profit rose to US$28.08 billion from US$17.42 billion a year earlier, and was also above the upper end of the company’s US$26.5 billion guidance issued in July.

Retail and advertising slow as Prime Day timing shifts

The shortfall in revenue was mainly driven by retail and advertising. Revenue from North America rose 6% year on year to US$112.85 billion, while international revenue increased 5% to US$43.11 billion, or 8% excluding the impact of foreign exchange. Revenue from online stores grew just 2%. Advertising revenue rose 11% to US$19.64 billion, or 12% excluding foreign exchange, slowing significantly from 26% in the second quarter.

Amazon said its Prime Day shopping event was held in the second quarter this year in most major markets, whereas it took place entirely in the third quarter last year. Excluding this timing effect, third-quarter revenue growth would have been about four percentage points higher. The company also said advertising revenue was affected by timing factors including Prime Day, and forecast growth in the high teens in the fourth quarter.

The year-on-year decline in earnings per share was linked to a high comparison base. In the third quarter of 2025, Amazon recorded a US$9.5 billion pre-tax gain from its investment in artificial intelligence start-up Anthropic. There was no comparable gain this year, causing net profit to dip 2% year on year to US$20.69 billion.

North America operating profit was US$8.72 billion, with an operating margin of 7.7%, compared with US$4.79 billion and 4.5% respectively a year earlier. However, the year-earlier period included about US$4.3 billion in settlement costs for the US Federal Trade Commission and severance expenses at group level, resulting in a lower base. Chief executive Andy Jassy said a broader selection of products and faster delivery were helping the retail business expand market share while improving margins.

AWS contributes more than 60% of operating profit

AWS was the main engine of profit growth. Third-quarter revenue from the business reached US$45.98 billion, ahead of the US$45.29 billion analyst estimate cited by CNBC, with its growth rate accelerating for a sixth consecutive quarter. Operating profit rose 55% year on year to US$17.77 billion, accounting for about 63% of the group’s operating profit. AWS operating margin, however, edged down to 38.7% from 39.4% in the second quarter.

Amazon said AWS had reached an annualised revenue run rate of US$184 billion in the latest quarter. Jassy expects AWS revenue to grow by more than 40% in both 2027 and 2028. New AWS contract customers listed in the earnings report include Meta, NVIDIA, OpenAI, Salesforce and Oracle. Jassy said in July that even with increased investment, computing capacity in 2026 would not be sufficient to meet all demand, and that a similar situation was expected in 2027.

US$77.26 billion infrastructure spending in one quarter; sharp fall expected in Q4

Spending remained the market’s main focus. Amazon’s purchases of property and equipment reached US$77.26 billion in the third quarter, or US$75.88 billion after deducting proceeds from disposals and subsidies. That compared with about US$44 billion in the first quarter and about US$53 billion in the second. Such spending covers data centres, servers and networking equipment, with the company saying the increase mainly reflected investment in artificial intelligence.

Amazon maintained its forecast for full-year 2026 cash capital expenditure of about US$220 billion. The forecast was raised from about US$200 billion in July, when Jassy attributed the increase to higher memory costs. In its latest risk disclosures, the company also listed volatility in resources and supplies, including memory chips, as one of the uncertainties it faces.

Amazon’s capital expenditure after deducting proceeds from disposals and subsidies had already reached about US$172.2 billion in the first three quarters. If full-year spending remains at about US$220 billion, fourth-quarter expenditure would be about US$48 billion, a sharp decline from the third quarter. CNBC’s investment club also said fourth-quarter spending was expected to fall significantly. This suggests the third quarter was likely the peak for spending this year, although Amazon did not say how much of it involved bringing orders forward.

US$42.36 billion net outflow is a 12-month figure

The huge spending was reflected directly in cash flow. In the 12 months ended September 30, Amazon’s operating cash flow rose 29% year on year to US$168.3 billion. But property and equipment expenditure after deducting proceeds from disposals and subsidies totalled US$210.66 billion over the same period, resulting in a free cash flow net outflow of US$42.36 billion, compared with a net inflow of US$14.79 billion a year earlier.

Based on the company’s cash flow statement, third-quarter operating cash flow was US$42.42 billion. After deducting US$75.88 billion in net capital expenditure, free cash flow recorded a net outflow of about US$33.46 billion. On a 12-month basis, free cash flow deteriorated sharply over the year: it still showed a net inflow of US$11.19 billion at the end of 2025, narrowed to US$1.23 billion in the first quarter of this year, turned into a US$7.6 billion net outflow in the second quarter and widened to US$42.36 billion in the third quarter.

Part of the funding gap was filled through borrowing. Amazon raised US$48.1 billion from issuing long-term debt in the third quarter. As of the end of September, long-term debt stood at US$173.1 billion, about 2.6 times the US$65.6 billion recorded at the end of 2025. Interest expense was US$1.69 billion in the third quarter, compared with US$540 million a year earlier.

Jassy said in July that investment in data centres generally takes place about two years before servers begin generating revenue. The company therefore faces pressure on free cash flow before new facilities become operational.

The AI infrastructure race is not unique to Amazon. Alphabet (GOOGL) raised US$25 billion through a bond issue in August. The share-price reactions of Alphabet, Microsoft (MSFT) and Meta (META), which reported results in the same week as Amazon, varied.

What to watch next

First, whether fourth-quarter capital expenditure falls to about US$48 billion as implied by the full-year guidance. If the pace of spending slows, pressure on free cash flow could ease. If the company raises its full-year guidance again, market concerns over cash flow could deepen.

Second, whether AWS can maintain its operating margin. Group depreciation and amortisation reached US$20.95 billion in the third quarter, an increase of about 25% year on year. As a new batch of data centres comes online, the depreciation burden is expected to continue rising, requiring revenue growth to keep pace.

Third, the performance of the holiday shopping season. Amazon expects fourth-quarter revenue of between US$240 billion and US$247 billion, representing year-on-year growth of 12% to 16%. The midpoint of US$243.5 billion is slightly below the average analyst estimate of about US$244.5 billion. Operating profit is forecast at US$28.5 billion to US$33.5 billion, compared with US$25 billion a year earlier.

Over the past 12 months, Amazon’s capital expenditure has exceeded operating cash flow by more than US$40 billion. The company is investing more than its current profits, with the gap being funded through debt and cash reserves. Whether this investment can be converted into returns, and whether AWS can grow by more than 40% over the next two years as management has said, will be the clearest test.