Amazon's $220 Billion AI Bet Triggers 7% Stock Drop Despite 39% AWS Growth

Amazon Reports Mixed Q3 Earnings as AI Infrastructure Spending Accelerates

Amazon reported third-quarter earnings that fell short of Wall Street expectations, with revenue reaching $201.9 billion—a 12% increase year-over-year but below the anticipated $202.31 billion1

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. The company's earnings per share came in at $1.89, missing the consensus estimate of $1.965

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. Net income totaled $20.7 billion, down from the previous year primarily due to gains recorded from its investment in Anthropic during the same period last year4

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. Amazon shares dropped 7% in after-hours trading following the announcement2

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Negative Free Cash Flow Driven by AI-Related Capital Expenditures

The most striking aspect of Amazon's Q3 earnings was the dramatic shift in free cash flow. The company reported negative free cash flow of $42.4 billion for the trailing twelve months ended September 30, 2026, compared to positive $14.8 billion during the same period in 20253

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. This massive swing was attributed primarily to a $94.8 billion increase in property and equipment purchases connected to AI infrastructure investments2

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. Amazon reiterated its expectation of $220 billion in capital expenditures for 2026, with analysts projecting spending could exceed $280 billion in 20271

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. The aggressive AI infrastructure spending has positioned Amazon among the hyperscalers collectively expected to spend more than $700 billion on capital expenditures in 2026, mostly on AI data centers4

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Amazon Web Services Growth Maintains Momentum

Despite concerns about AI infrastructure spending, Amazon Web Services demonstrated robust performance with third-quarter sales rising 39.3% to $45.98 billion, exceeding Wall Street targets of $45.48 billion1

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. This marked AWS's fifth consecutive quarter of revenue acceleration, with growth rates reaching their fastest pace in five years5

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. CEO Andy Jassy revealed that Amazon's cloud capacity is "largely sold out" for next year, with significant commitments already secured for 20281

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. Gene Munster from Deepwater Asset Management highlighted management's projection of more than 40% AWS revenue growth in both 2027 and 2028, with Jassy expecting AWS could become a trillion-dollar business within five to 10 years5

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. Cloud computing demand continues to drive Amazon's AI strategy, with the company installing an AI accelerator approximately every 14 seconds5

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Advertising Business Faces Headwinds from AI Shopping Agents

Amazon's advertising business grew 12% year-over-year in Q3, significantly trailing the previous quarter's 26% growth and missing analyst expectations of $20.82 billion1

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. This slowdown has raised investor concerns about competitive pressures from AI shopping agents like Meta's Muse, which could bypass Amazon's platform and the sponsored advertisements that drive profits3

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. In response to this threat, Amazon blocked Meta's Muse AI agent from shopping on its platform earlier this quarter, stating it was not given advance notice and never agreed to participate1

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. Amazon has also blocked dozens of external agents, including Perplexity, which the company sued over allegations of concealing AI shopping bots1

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. However, Andy Jassy defended Amazon's position on the earnings call, stating that customer interactions with Alexa for Shopping were up 570% year-over-year, with U.S. customers using the tool spending 50% more per order2

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Strategic Positioning and Future Outlook

Amazon's management appears intent on positioning the company as an AI data center and semiconductor powerhouse rather than primarily a retailer. The company is developing Trainium, custom-designed AI accelerator chips seeking to challenge Nvidia's dominance in the AI chip market2

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. Jassy emphasized that Amazon is "very well positioned for what's happening in AI," citing initiatives like Bedrock, Amazon's AI model marketplace2

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. The company's relationship with Anthropic has deepened significantly, with Amazon investing about $18 billion and committing up to another $15 billion. Anthropic has committed to spending at least $110 billion on Amazon cloud services from May through April 20364

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. For the fourth quarter, Amazon projected revenue between $240 billion and $247 billion, with operating income between $28.5 billion and $33.5 billion—the latter range falling below analyst predictions4

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. As Amazon enters its crucial holiday quarter, which generates most of its yearly revenue, the company plans to hire 300,000 workers while simultaneously cutting jobs in other divisions, having laid off more than 57,000 staffers since 20221

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