Amazon's free cash flow turns negative amid investments in AI infrastructure

Original author: Su Yang

Original editor: Xu Qingyang

Source: Tencent Tech

On October 29 in the United States, Amazon announced its third-quarter 2026 financial results.

The financial report showed that Amazon's revenue for the quarter was $201.944 billion, a 12% year-over-year increase; operating profit was $28.076 billion, up 61% year-over-year; net profit was $20.685 billion, down 2% year-over-year; and diluted earnings per share were $1.89, below $1.95 in the same period last year. Both revenue and earnings per share fell short of market expectations.

The decline in net profit was primarily due to the high base effect from the investment gain related to Anthropic in the same period last year. In the third quarter of 2025, Amazon recorded a pre-tax gain of $9.5 billion related to this investment, which elevated the comparison base.

Amazon's third-quarter operating profit margin reached 13.9%, a record high. However, its free cash flow over the past 12 months was negative $42.357 billion, compared to $14.788 billion a year ago. This means that investments in AI infrastructure are boosting cloud revenue while rapidly increasing capital requirements.

Amazon expects fourth-quarter revenue of $240 billion to $247 billion, below the average analyst estimate. Meanwhile, Amazon maintains its $220 billion capital expenditure plan for 2026.

After the earnings report, the stock fell more than 7% in after-hours trading. Behind the stock's reaction, investors are no longer just focused on the performance of a single quarter, but rather on Amazon's operating rhythm over the next several quarters.

This also makes Amazon’s key questions for the quarter more specific: Can AWS continue to absorb additional computing power, can AI revenue cover infrastructure investments, and can the retail business generate sufficient cash flow during the year-end shopping season?

AWS remains Amazon's most important growth engine this quarter.

Revenue for the third quarter was $45.984 billion, a 39.3% year-over-year increase, higher than the 36.7% in the second quarter, marking the fastest growth rate in nearly five years. At this scale, AWS's annualized revenue run rate is approximately $184 billion.

AWS operating profit reached $17.773 billion, a year-over-year increase of approximately 55%; the operating margin was 38.7%, slightly lower than the 39.4% in the second quarter but higher than the 34.6% in the same period last year. Both revenue and profit grew rapidly, while the margin saw a slight sequential decline.

The growth in backlog orders is a key indicator for AWS's next phase of revenue.

Amazon CEO Andy Jassy disclosed on the earnings call that AWS's backlog reached $578 billion, up from $496 billion at the end of the second quarter. The backlog represents contracted amounts that have been signed but not yet recognized as revenue; actual revenue still depends on resource delivery and customer usage.

Jia Xi said that the company currently installs an AI accelerator every 14 seconds on average, and demand from customers for additional computing power remains strong. He expects AWS’s revenue growth to exceed 40% in both 2027 and 2028.

Retail growth was relatively modest. In the third quarter, Amazon's North American business revenue reached $112.852 billion, a 6% year-over-year increase; international business revenue was $43.108 billion, up 5% year-over-year, or 8% excluding currency effects.

The adjustment of Prime Day timing affected the year-over-year performance for the quarter. In 2026, Prime Day events in most major markets were moved to the second quarter, whereas last year they were entirely included in the third quarter. Amazon stated that, excluding this timing difference, its third-quarter revenue growth would have been approximately 4 percentage points higher.

Advertising revenue grew 12% in the third quarter, excluding currency exchange impacts, and Amazon expects growth in the fourth quarter to return to the high single digits. Amazon did not disclose the specific revenue amount for its advertising business in this earnings report.

Amazon is expanding its AI business from underlying computing power to model services and agent development.

In the third quarter, spending by Fortune 500 companies on Amazon Bedrock increased nearly sevenfold year-over-year, and total platform token calls grew nearly seventeenfold.

Bedrock is AWS's model platform service for enterprises, allowing customers to access models from various providers and deploy AI applications on AWS infrastructure.

This quarter, Bedrock added models from companies such as OpenAI, Anthropic, Moonshot, xAI, and Zhipu, further expanding options for enterprise customers. Amazon also added built-in web search functionality for OpenAI models, enabling enterprises to retrieve real-time information when invoking the models.

On the agent front, Amazon has launched the public preview of Bedrock Managed Agents, helping businesses build and deploy AI agents in production. Developers can also use Strands Harness to build agents. Amazon says that, using the same cutting-edge models, this tool improves token efficiency, reduces task costs by 32%, and maintains comparable or higher accuracy.

These products cover model invocation, agent development, and deployment. However, Amazon has not yet disclosed revenue separately for Bedrock and agent services, and increased platform usage does not directly equate to revenue growth.

Self-developed chips are a key component of Amazon's strategy to reduce computing costs and differentiate its AWS offerings.

Jasi stated on the earnings call that revenue commitments for Trainium and Graviton grew more than 20 times year-over-year, with the overall chip business maintaining triple-digit growth. Trainium is primarily used for AI model training and inference, while Graviton targets general-purpose cloud computing.

In the third quarter, Amazon also disclosed new AWS agreements with companies such as Meta, NVIDIA, OpenAI, Salesforce, Oracle, Qualcomm, Verizon, and Stripe. However, the company did not disclose the specific chip models, computing capacity, or procurement amounts associated with these agreements.

However, the procurement or hashing power agreements signed by customers need to be gradually recognized as revenue as chips are delivered and put into actual use.

Amazon previously disclosed that its in-house chip business has an annualized revenue run rate exceeding $25 billion.

Amazon has revealed that it is expanding the deployment of its next-generation chips and plans to extend the use of Trainium beyond AWS in the second half of 2027.

Previously, Anthropic built the Project Rainier computing cluster using Trainium 2, deploying over 500,000 chips.

Expanding external usage will create new sales channels for Trainium, but also requires Amazon to further enhance its software ecosystem, supply chain, and customer support.

Graviton primarily serves EC2 cloud computing instances. Amazon aims to improve server performance and energy efficiency while reducing dependence on external processor suppliers through its own CPU development.

Investments in AI infrastructure continue to increase Amazon's cash outflows.

In the third quarter, Amazon's cash outflows for the purchase of property and equipment reached $77.259 billion, compared to $35.095 billion in the same period last year; net outflows, after deducting proceeds from asset sales and related incentives, amounted to $75.878 billion. Cumulative cash outflows for the purchase of property and equipment over the first three quarters reached $175.670 billion.

Amazon maintains its full-year expectation of approximately $220 billion in cash capital expenditures, without further raising it in this earnings report. The company had previously increased its full-year investment plan to this level, primarily for data centers, servers, networking equipment, and AI infrastructure.

The growth in capital expenditures is also beginning to impact cash flow. For the trailing 12 months ended September 30, Amazon's operating cash flow reached $168.3 billion, a 29% year-over-year increase. Free cash flow, however, was negative $42.4 billion, compared to positive $14.8 billion in the same period last year.

Over the past 12 months, the company's operating cash flow increased by $37.6 billion, but net capital expenditures increased by $94.8 billion, exceeding the increase in operating cash flow. This is the primary reason free cash flow turned negative.

Amazon expects fourth-quarter revenue of $240 billion to $247 billion, representing a 12% to 16% year-over-year growth; operating profit of $28.5 billion to $33.5 billion, above $25 billion in the same period last year.

The market had anticipated Amazon's fourth-quarter revenue to be around $244.5 billion, while the company's guidance midpoint was $243.5 billion, slightly below analyst expectations. After the earnings report, Reuters and The Wall Street Journal linked the stock decline to revenue guidance, capital expenditures, and pressure on free cash flow.

The fourth quarter is Amazon's most important retail sales season of the year. The company expects its advertising business growth to return to double digits and plans to hire approximately 300,000 seasonal employees in the U.S. to meet holiday shopping demand.

Before this earnings report, the market expected Amazon's third-quarter revenue to be approximately $202.2 billion, adjusted earnings per share of about $1.97, and AWS growth of approximately 37% to 38%. Actual AWS performance exceeded expectations, but revenue, earnings per share, and fourth-quarter revenue guidance all fell short of market requirements.

Investors are focused on two key areas: whether AWS can sustain its current growth rate, and when substantial capital expenditures will translate into revenue and cash flow.

AWS growth has accelerated, indicating continued expansion in enterprise cloud computing and AI computing demand. However, Amazon’s infrastructure investments are also rising rapidly, and free cash flow has turned negative over the past 12 months. Fourth-quarter revenue guidance fell below market expectations, meaning investors still need more evidence that new computing capacity will consistently translate into revenue and profit.