Amazon: Record-breaking operating margin outshined by capex growth

Report in Figures

• Operating profit reached $28.1bn, comfortably surpassing the upper bound of the company’s guidance ($22.5bn-$26.5bn).
• The operating margin (13.9%) rose to the highest level in Amazon’s history.
• Revenue in the key AWS segment grew by 39% to $46bn (the fastest pace in nearly five years), with the segment’s margin standing at 38.7%.
• Revenue ($201.9bn) and EPS ($1.89) came in slightly below consensus.
• Trailing 12-month free cash flow fell to -$42.4bn.

Amazon shares lost approximately 6% in after-hours trading, following a decline of over 4% during regular market hours. The headline metrics that investors typically examine first, namely revenue and earnings per share, proved disappointing. The latter fell noticeably short, missing by around $0.08. Nevertheless, the report’s core line items performed reasonably well. Revenue in the vital AWS sector surged by 39% (to $46bn), while operating profit exceeded the upper end of company guidance ($28.1bn). Actual Consensus Revenue $201.9bn c. $202.2bn EPS $1.89 c. $1.97 AWS revenue $46.0bn c. $45.4bn AWS operating margin 38,7% c. 37.3% North America revenue $112.9bn c. $113.8bn North America operating margin 7,7% c. 6.8%

Anthropic distorts the picture

Net profit came in at $20.7bn, representing a decline on paper compared to the previous year’s level ($21.2bn). However, it is worth noting that in Q3 2025 Amazon recorded a $9.5bn gain from its investment in Anthropic, which significantly inflated the comparative result. In Q3 2026, non-operating items generated a $1.2bn loss, while interest expense increased to $1.7bn. Operating profit presents a much stronger picture (rising to $28.1bn from $17.4bn a year earlier). Here again, several nuances must be considered, namely the FTC settlement (c. $2.5bn) and severance costs (c. $1.8bn), which weighed on the prior-year figure. Excluding these items, growth stands at approximately 29% rather than 61%. Nevertheless, this remains a highly robust performance.

Silver linings in the cloud

The importance of AWS to the wider business continues to grow, and at a faster pace than expected. Cloud services accounted for 23% of total revenues in Q3 2026 ($46bn, up 39% YoY) and a remarkable 63% of group operating profit. Although the margin edged down slightly from the preceding quarter (from 39.4% to 38.7%), it came in comfortably ahead of expectations (c. 37.3%). This delivers a key message and provides one of the strongest reasons for optimism regarding the company’s outlook. Andy Jassy signaled that AWS revenue growth will maintain strong momentum despite the elevated base, projecting annual growth of over 40% in both 2027 and 2028. New AWS agreements were secured with Meta, NVIDIA, OpenAI, Salesforce, Oracle, and Qualcomm, among others. Token usage volume in Bedrock surged nearly 17-fold year-on-year, while spending on the service by Fortune 500 clients rose almost 7-fold.

Prime Day timing dampened sales, but by how much?

Shifting Prime Day from Q3 to Q2 was expected to lower this year’s Q3 sales growth by around 4 percentage points. Consequently, North American sales grew 6% to $112.9bn, while online store sales rose just 2% to $68.5bn (against market expectations of c. $69.6bn). Advertising revenue reached $19.6bn, reflecting an 11% increase (12% FX-neutral). This represents a slowdown from 26% in the second quarter and fell below market consensus, with Amazon once again citing the shift of Prime Day into Q2. Profitability, on the other hand, proved stronger: the operating margin in North America reached 7.7% against a consensus estimate of 6.8%, with segment operating profit coming in at $8.7bn compared to $4.8bn a year earlier. Heading into the release, concerns were primarily centered on retail margins, making this outcome a positive surprise.

Fourth-quarter guidance

Amazon expects revenue in the range of $240bn-$247bn (representing 12%-16% YoY growth) and operating profit between $28.5bn-$33.5bn, compared to $25bn a year earlier. The midpoint of the revenue range ($243.5bn) sits slightly below consensus expectations of c. $244.5bn. Profit guidance, however, is solid, with the lower end of the range exceeding the Q3 performance.

The cost of expansion

Downward pressure on the share price appears to stem from concerns over the cost of expansion. In the third quarter, Amazon spent c. $76bn net on property, plant and equipment, more than double the prior-year figure (c. $34bn). While trailing 12-month operating cash flow increased 29% to $168.3bn, capital expenditure grew at a far steeper rate, driving trailing 12-month free cash flow (FCF) down to -$42.4bn (compared to +$14.8bn a year earlier). In Q3 alone, FCF was approximately -$33bn. Long-term debt increased from $65.6bn at the end of 2025 to $173.1bn at the end of Q3, of which $48.1bn originated from third-quarter issuances alone. Amazon maintained its full-year 2026 capital expenditure guidance at c. $220bn. This assumption appears relatively conservative given that $172bn was already spent in the first nine months. It implies either a significant deceleration in investment during Q4 (from $76bn to $48bn) or an overrun relative to original guidance.

Opinion

The market had known for months that Amazon was spending more than it generated in cash flow. However, the sheer scale came as a surprise, which hit Amazon shares particularly hard in the current environment as Q3 free cash flow plunged by c. $35bn YoY. The company gave no indication of when this trend might reverse. Furthermore, evidence suggests the firm may exceed its original 2026 capex guidance, compounded by minor misses across revenue, advertising, and EPS. In our view, the extent of the sell-off is overdone. The impressive operating performance of AWS ($17.8bn profit, 38.7% margin) alongside guidance pointing to sustained high revenue growth in this vital sector over the coming years provide solid grounds for optimism regarding the company’s ability to translate massive capex into earnings growth.

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