Amazon sinks as AI spending eclipses fastest cloud growth in five years

By Deborah Mary Sophia and Greg Bensinger

Oct 29 (Reuters) - Amazon.com on Thursday reported a massive cash burn in the third quarter, sending shares sharply lower, while it signaled higher capital expenditures next year atop an already huge amount in 2026.

Amazon's cloud computing cash cow, Amazon Web Services, continued to accelerate, but the company's aggressive spending to capture AI demand overshadowed broader growth that investors typically crave — with more such spending to come.

The Seattle-based retailer expects revenue between $240.0 billion and $247.0 billion in the fourth quarter, bracketing estimates of $244.51 billion, according to LSEG, but its midpoint of $243.5 billion came in slightly lower.

Investors soured on the company, driving shares down as much as 7% in extended trading, and the shares had declined 4.3% in regular trading to end at $243.79. The drop mirrored a broader selloff among tech stocks on Thursday after Intel warned of flagging PC revenue through next year's first half, sending its shares down 23% in after-hours trading. Alphabet shares fell 12% during the regular session, their worst single-day percentage decline ever.

The company said it burned $42.4 billion on a trailing 12-month basis in the September quarter, driven by capital expenditure of $77.26 billion, which was some $20 billion above estimates, according to data compiled by LSEG. Amazon reported cash burn of $7.6 billion in the prior quarter, and generated $14.8 billion in the third quarter of last year.

"The free cash flow looks like the ugly part of the report," said Dave Wagner, portfolio manager at Aptus Capital Advisors. "Operations generated plenty of cash but their capex just absolutely swallowed it."

"The trend is pretty steep and pretty negative, and that's the big thing that is alarming in this report."

Like competitors, Amazon has made a huge spending commitment to developing AI software and infrastructure, forecasting $220 billion in capital expenditures this year. Amazon and Google parent Alphabet have maintained their spending expectations, though Microsoft on Wednesday lowered its own to $170 billion from $175 billion.

CEO Andy Jassy told analysts on a conference call he expected capital expenditures to be "meaningfully more" next year, compared with 2026, without elaborating.

Jassy tried to lessen investor concerns following the results. "Our strategy is working and I expect it will for the foreseeable future," he said. He said AWS could reach a trillion dollars in revenue in as little as five years, adding, "our AWS investment in functionality and infrastructure is working.” He also said, "I'm not aware of another retail business approaching Amazon's revenue size."

Still, Jesse Cohen, a senior analyst at Investing.com, also pointed to Amazon's free cash flow and "weak guidance" as reasons for the share decline. "Amazon's third-quarter report landed as a double disappointment."

CLOUD BUSINESS DRIVES GROWTH

Revenue at Amazon Web Services rose 39% to $46 billion in the third quarter ended September, compared with analysts' estimate for a 38.2% increase to $45.61 billion, according to data compiled by LSEG. AWS revenue recorded a 37% jump in the second quarter.

Advertising sales were another disappointment, rising just 12% to $19.6 billion from a year earlier, below the 18% estimate from LSEG — the first time they missed analyst estimates in seven quarters. The results marked much slower growth than the second quarter's 26% or the 2025 third quarter's 22%.

Jassy, nonetheless, said he was "pleased" with advertising sales and said moving the Prime Day discount event to the second quarter had impacted overall ads in the period. He forecast a return to "high teens" ad sales growth in the current quarter.

He dismissed concerns that AI shopping agents, which automate people's purchasing, had impacted ad sales. The company during the quarter blocked Meta's Muse agent from accessing its site to shop on customers' behalf.

The downbeat fourth-quarter outlook signals US retailers could face pain in the holiday season, as consumers tighten shopping budgets amid higher gasoline prices and the rising cost of living.

Still, recent industry forecasts predict holiday sales will accelerate from last year. The National Retail Federation earlier this month predicted a 4.2% jump in total US holiday season sales.

While retail sales account for the majority of Amazon's revenue, investor focus has shifted sharply toward its cloud computing business, Amazon Web Services, in recent years, as the tech company spends heavily to build out data centers and compete in the global AI race.

Amazon's cloud unit grew at its fastest pace in nearly five years.

At its e-commerce business, Amazon has been rolling out faster delivery services globally and expanding to more rural areas in the US to draw more shoppers.

(Reporting by Deborah Sophia in Bengaluru and Greg Bensinger in San Francisco; Additional reporting by Arriana McLymore in New York; Editing by Pooja Desai and Matthew Lewis)