Discussing Amazon’s Q3 earnings: “flaws don’t overshadow the strengths.” The results were actually solid, but under current market conditions, some imperfections stand out. First, the flaws: 1) Revenue slightly missed expectations, largely because this year’s Prime Day occurred earlier in Q2 across most of Amazon’s key markets, whereas last year it fell in Q3. Net profit was $20.69 billion, down from $21.19 billion in the same period last year; diluted EPS was $1.89, a 3% year-over-year decline. This drop was primarily due to a high non-recurring base last year—Amazon recorded a $9.5 billion pre-tax gain in Q3 2025 from its investment in Anthropic, with no similar gain this quarter. Advertising revenue underperformed expectations; the company attributed this to timing factors like Prime Day and expects advertising growth to rebound into the high single digits in Q4. If this guidance holds, the slowdown in Q3 advertising may reflect timing noise rather than structural weakening. 2) The market’s biggest concern: AI capital spending became the core pressure on the stock price: the sharp turn to negative free cash flow was the key driver of the market’s negative reaction. Amazon’s Q3 capital expenditures reached $77.26 billion—about 1.2 times last year’s level and over 34% higher than expectations. Free cash flow turned negative for the second consecutive quarter, shifting from an inflow of $14.79 billion last year to an outflow of $42.36 billion, far exceeding the outflow in Q2. The company maintained its full-year 2026 cash capital expenditure guidance at approximately $220 billion, offering no signal of slowing AI investments. 3) Q4 guidance offered no surprises: Amazon’s Q4 guidance remained broadly in line with Wall Street expectations. The company forecast net sales between $240 billion and $247 billion, representing year-over-year growth of 12% to 16%. The midpoint of $243.5 billion was slightly below analyst expectations of $244.52 billion, though still within the guidance range. Operating profit guidance was set at $28.5 billion to $33.5 billion, compared to market expectations of around $33.1 billion. In other words, the upper end of guidance only slightly exceeded consensus, while the midpoint of $31 billion fell below expectations. Now for the highlights: 1) Amazon’s Q3 operating profit was $28.08 billion, a 61% increase from $17.42 billion last year; operating margin rose from 9.7% to 13.9%. 2) The biggest highlight remains AWS. AWS net sales grew 39.3% year-over-year to $45.98 billion—1.3% above analyst estimates—marking its highest quarterly growth rate in nearly five years. Annualized revenue at quarter-end reached $184 billion, up 8.9% from Q2. In summary: Amazon’s Q3 revenue and EPS both slightly missed expectations; advertising revenue was slightly below forecast; Q4 profit guidance midpoint was weak; capital expenditures significantly exceeded expectations, and full-year AI investment plans remain elevated. However, AWS’s strong growth and record-high operating margin were standout positives. Yet under today’s market conditions, investors are more focused on whether AI spending will continue to suppress free cash flow, and whether these high capital expenditures can translate into sufficiently high profits and cash returns within a foreseeable horizon—hence the post-earnings stock decline. How should we view Amazon’s earnings? From my perspective: “flaws don’t overshadow the strengths.” The core issue is growth potential—everyone understands the burning cash, but the market remains unclear about how far AWS and Amazon can scale. However, this Q3 earnings report and earnings call actually revealed a clearer picture of that future vision: 1) CEO Andy Jassy described AWS’s current growth dynamic as a self-reinforcing “flywheel”: leading capabilities and security attract customers to migrate to the cloud; centralized data and applications on the cloud then drive AI inference demand; AI inference increases consumption of core compute, storage, and networking resources, which in turn fuels continued investment in AWS’s foundational infrastructure. In response to a Goldman Sachs question, Jassy suggested that multiple models—each with comparable capabilities suited for different tasks—will emerge, and enterprises will combine them within single applications, switching between them based on evolving price and performance dynamics. He believes Bedrock has the potential to grow into a service scale comparable to EC2. Evidence of mainstream enterprise demand has solidified: Fortune 500 companies’ spending on Bedrock has nearly quadrupled compared to the same period last year, indicating clear expansion in real corporate consumption; Total token usage on Bedrock has grown nearly 17-fold year-over-year; The number of agents deployed in Q3 was roughly double the total deployed across the prior three quarters combined. These figures confirm rapidly accelerating inference demand and broader enterprise adoption of agent deployment. 2) Selling self-developed chips could be a new highlight: In Q3 alone, customers using Amazon’s custom chips (Graviton and Trainium) saved over $2 billion. Revenue commitments for Trainium and Graviton increased more than 20-fold year-over-year. Jassy revealed: Due to such strong demand for Trainium, customers have repeatedly encouraged us to offer it outside AWS—we plan to do so by late 2027. 3) AWS revenue potential over the next two years: Jassy also expects AWS growth rates above 40% in both 2027 and 2028, with potential to reach $1 trillion in annual revenue within five to ten years. Meanwhile, backlog orders reached $578 billion, with year-over-year growth in triple digits. According to Jassy’s figures—AWS annualized revenue at $184 billion in Q3—if growth rates exceed 40% annually through 2027 and 2028 (using the minimum 40% assumption), AWS revenue could exceed $360 billion by 2028. 4) Unwavering commitment to spending: The market worries about Amazon’s capital expenditures—but management expects this spending to “significantly increase” again by 2027. In response to this pace of investment, Jassy’s stance is resolute: he views it as a strategic build-out of a long-term platform—not merely short-term data center leasing. His exact words: “AI is a once-in-a-lifetime opportunity—it’s the greatest technological transformation of our lifetime. If we can sustain over 40% annual growth for two consecutive years on an $18.4 billion business and ultimately reach a trillion-dollar scale, we must invest to maintain leadership.” One line from Jassy’s earnings call captures the magnitude of this gamble: “We have the financial capacity to fund this plan—I believe it will permanently transform Amazon’s scale, revenue, and free cash flow.”