Amazon 3Q26 Earnings Update: A Two-speed Company; Maintain BUY

Amazon delivered a mixed set of 3Q26 results, as strong performance from its cloud business contrasted with slower revenue growth in retail and advertising, while reported EPS slipped year-on-year against a tough prior-year comparison. Meanwhile, heavy capital expenditure drove free cash flow deeply negative.

A marginal revenue miss and lower reported EPS

Reported top and bottom-line figures were disappointing, with both missing consensus estimates. Revenue of $201.9 billion landed marginally below expectations of around $202 billion. Separately, management attributed part of the year-on-year growth slowdown to the Prime Day shift into Q2. Excluding this timing effect, revenue growth would have been approximately 400 basis points higher, indicating that underlying top-line growth remained healthy rather than weak.

Diluted EPS tells a similar story, reversing the trend seen over the past two quarters: the reported figure of $1.89 represented a 3% decline from $1.95 a year ago, coming in modestly below the $1.96 consensus estimate. However, this largely reflected the prior-year investment gain rather than a deterioration in operating performance. Q3 2025 net income included a $9.5 billion pre-tax gain on Amazon's Anthropic stake booked under non-operating income, whereas Q3 2026 had no comparable mark (other income recorded a minor $0.7 billion loss). Another persistent drag on EPS was interest expense, which more than tripled to $1.7 billion as long-term debt ballooned.

Source: Company Announcement (Amazon Q3 2026 Form 8-K, SEC), iFAST compilations. Data as of 29 October 2026. Consensus figures are approximate pre-print Street compilations. Not investment advice.

The Issue Is Not Its AI Business

Amazon’s cloud division, AWS, remained the standout driver. Revenue grew 39% year-on-year to $46.0 billion ($184 billion annualised run rate), marking its fastest expansion in nearly five years and beating consensus expectations of 38%. This extends the re-acceleration from 37% in Q2. Segment operating income surged 55% to $17.8 billion with a strong 38.7% margin, dipping slightly from 39.4% in Q2 as capex-driven depreciation costs began to feed through. Crucially, CEO Andy Jassy provided an unusually long, high-conviction runway, guiding AWS revenue growth to "over 40%" in both 2027 and 2028. This outlook is underpinned by a 17-fold surge in Bedrock token volume and major enterprise commitments (including Meta, NVIDIA, OpenAI, Salesforce, and Oracle).

Backlog reached $578 billion, growing 189% year-over-year. Management also noted that customers are taking up new AI accelerator capacity almost as quickly as AWS can install it, while core compute and storage revenue grew at their fastest rates in several years. AWS remains capacity-constrained while sustaining a strong operating margin.

Within AWS, custom silicon is scaling rapidly. Management noted triple-digit growth in the chip business, with revenue commitments for Graviton and Trainium each surging over 20x year-on-year. Beyond pure AI accelerators, Graviton CPUs are benefiting from post-training, reinforcement learning, and agentic workflows, offering 30% to 40% better price-performance than commercial alternatives. Notably, demand for legacy instances remains tight despite new rollouts: backlog for prior-generation Graviton instances more than doubled quarter-on-quarter following the Graviton5 launch, while short-term Trainium capacity commanded higher pricing premiums than in 1H.

In a key strategic milestone, Amazon confirmed plans to make Trainium externally available beyond AWS by late 2027. Management disclosed that custom silicon saved clients over $2 billion in Q3 alone, cementing its cost-efficiency thesis.

External commercialisation would broaden Trainium's addressable market, potentially increasing competition with established providers like NVIDIA and Broadcom. The underlying strategy relies on vertical integration: proprietary silicon could lower AWS’s inference costs and allow it to retain more of the economic value generated across its infrastructure.

AWS's trajectory is evolving from a cloud-workload recovery into a structural, silicon-led growth narrative. The combination of persistent capacity constraints, management’s expectations for revenue growth above 40% in 2027 and 2028, and large enterprise commitments supports revenue visibility.

Furthermore, external Trainium commercialisation and Graviton’s CPU dominance could improve compute economics. We view AWS as the primary anchor underpinning Amazon's valuation during this elevated capex cycle.

Figure 1: AWS businesses growth remains robust

Other Segments Were the Main Drag

North America revenue grew 6% to $112.9 billion, yielding an operating income of $8.7 billion (a 7.7% margin). International revenue rose 5% (8% FX-neutral) to $43.1 billion, with operating income reaching $1.6 billion (a 3.7% margin), maintaining its steady path towards sustained profitability. Looking at disaggregated revenue streams, Online Stores grew by just 2% to $68.5 billion—a sharp deceleration from 15% growth in Q2 and 10% in the prior-year period. This slowdown was driven primarily by the Prime Day timing shift into Q2, rather than underlying demand weakness.

Yet, management remains satisfied with the efficiency gains, citing faster delivery speeds as Amazon expands its same-day network  and Air ultra-fast delivery services. The company is also on track to reduce cost-to-serve per unit for the fourth consecutive year.

Alongside these efficiency gains, Amazon continues to expand its grocery and pharmacy businesses  with its gross sales grew to nearly $250 billion in the trailing 12 months. In Q3, fresh groceries and everyday essentials grew about 3x faster than the rest of the stores, representing about half of all units sold. The number of customers using Amazon Pharmacy is up over 60%year-over-year.

For the company’s AI shop assistant, over 400 million customers have used Alexa for Shopping in the last 12 months, with customer interactions up 570% year-over-year. U.S. customers using Alexa for Shopping are spending 50% more per order than those who don't.

This timing shift also impacted Advertising, where revenue grew 11% to $19.6 billion, marking a deceleration from 26% in Q2. However, management guided for advertising revenue growth to re-accelerate to the high teens in Q4.

Management said external agentic shopping tools are not yet materially affecting Amazon Ads, as adoption remains limited and the shopping experience offers few advantages over visiting retailers directly.

Figure 2: Traditional businesses are slowing

The pressure point – Capital Expenditure

Capital expenditure reached $77.3 billion during the quarter, up sharply from $35.1 billion a year earlier and coming in well above consensus estimates of $58.7 billion, up from $54 billion in Q2. Management maintained its full-year 2026 capex forecast of roughly $220 billion, while signalling that capital spending will increase meaningfully further in 2027.

Trailing twelve-month (TTM) operating cash flow grew 29% to $168.3 billion—a healthy figure, but no longer sufficient to cover the aggressive build-out. Consequently, TTM free cash flow swung to a negative $42.4 billion from a positive $14.8 billion a year ago—a negative shift of nearly $57 billion. With this $42.4 billion deficit, Amazon marks the largest FCF outflow among hyperscalers.

The financing response has been equally striking. Long-term debt rose to $173.1 billion from $65.6 billion at year-end 2025, with approximately $48 billion raised in Q3 alone. This expansion accounts for the surge in interest expense that has dragged on net earnings.

Figure 3: CAPEX increased significantly but target remains

Guidance was also mixed

Amazon guided fourth-quarter revenue to between $240 billion and $247 billion. The midpoint of $243.5 billion fell below consensus expectations of $244.5 billion, presenting a minor disappointment given that Q4 is traditionally Amazon's peak revenue period driven by holiday shopping.

However, the company provided a robust outlook for AWS, reiterating expectations for revenue growth rates of "over 40%" in both 2027 and 2028. Growth here remains constrained primarily by capacity, with management noting that cloud capacity is already fully committed for 2026 and 2027, as well as a large portion of 2028.

Key Takeaway

Amazon reported a classic "two-speed" quarter: its AI and cloud division, AWS, is re-accelerating along an exceptionally long growth runway, while its core retail business faces temporary headwinds.

In our view, the slowdown in reported retail revenue growth largely reflects the Prime Day timing shift, while improving operating profitability suggests underlying operations remain resilient. However, investors may increasingly focus on whether AWS can translate its strong demand pipeline into cash returns sufficiently to justify its massive capex.

We continue to monitor whether macroeconomic headwinds—such as elevated fuel prices and higher interest rates—will dampen US consumer spending on the platform. Overall, we maintain that AWS's exceptional trajectory supports Amazon’s long-term earnings expansion, although the pace of free cash flow recovery remains a key uncertainty. Consequently, we maintain our BUY rating on Amazon with a lower TP at $275.