Can AWS growth help Amazon shares rebound from the post-earnings selloff?

Amazon shares came under heavy selling pressure in after-hours trading on Thursday, October 29, after the e-commerce giant reported third-quarter earnings and revenue below Wall Street expectations. The stock fell more than 9% following the results, as investors assessed disappointing financial performance, mounting artificial intelligence investments and a cautious outlook for the holiday quarter. (Sources: Reuters, Yahoo Finance, Amazon)

Amazon expects capital expenditure to reach approximately $220 billion in 2026, with investments largely directed towards artificial intelligence infrastructure, data centres and cloud computing capacity. The scale of spending has raised concerns about whether returns from AI investments will justify the enormous financial commitment. CEO Andy Jassy also indicated that capital expenditure would be meaningfully higher next year, adding to investor worries over the company's spending trajectory.

Amazon reported third-quarter revenue of $201.9 billion, up 12% from $180.2 billion in the corresponding period last year. However, the figure fell short of analysts' expectations of approximately $202.25 billion. Earnings per share came in at $1.89, compared with estimates of $1.97. Net income declined to $20.7 billion from $21.2 billion a year earlier, partly reflecting investment-related gains in the previous year's quarter.

Amazon's aggressive infrastructure expansion has put significant pressure on its cash flow. Free cash flow turned negative at $42.4 billion on a trailing 12-month basis through September, compared with a positive inflow of $14.8 billion a year earlier. Operating cash flow increased 29% to $168.3 billion, but a sharp increase in purchases of property and equipment, largely linked to AI investments, outweighed the improvement.

Amazon Web Services (AWS) remained a major bright spot in the September quarter, with revenue increasing 39.3% year-on-year to $46 billion. This marked its fastest growth in nearly five years and exceeded analysts' expectations of around $45.6 billion. AWS operating income climbed to $17.8 billion from $11.4 billion a year earlier, highlighting strong demand for cloud computing and AI-related infrastructure.

Amazon forecast fourth-quarter revenue of $240 billion to $247 billion, below analysts' average estimate of approximately $244.51 billion at the midpoint. The cautious outlook raised concerns about consumer spending during the crucial holiday shopping season, as households contend with higher living costs and inflation. The company expects fourth-quarter operating income of $28.5 billion to $33.5 billion.

Amazon's advertising business reported revenue of $19.6 billion, reflecting 12% growth year-on-year excluding foreign exchange movements. Growth was affected by timing-related factors, including the shift in Prime Day. The company expects advertising revenue growth to return to the high teens in the fourth quarter. Investors will watch whether stronger cloud growth and advertising performance can eventually offset the rising costs of AI infrastructure expansion.

(Disclaimer: This slideshow is based on inputs from agencies. These do not represent the views of The Economic Times)