Amazon Shares Fall 7% After Q3 Earnings Miss
TREE NEWS reports: Amazon.com Inc. reported third-quarter revenue of $201.9 billion, up 12% year-over-year but below analyst estimates, sending shares down about 7% in after-hours trading. The miss was driven by a sharp slowdown in online retail sales and advertising, which overshadowed another quarter of accelerating growth at its cloud computing unit, AWS.
The results echo the market reaction to Alphabet Inc. just days earlier. Alphabet shares plunged 13% on Thursday—their worst single-day decline on record—after its search and advertising revenue fell short of expectations, despite strength in its own cloud business. Both companies are now grappling with the same investor anxiety: massive AI-related capital expenditures are pressuring free cash flow and core business growth, while the timeline for monetization remains uncertain.
Cloud Acceleration Fails to Offset Retail Weakness
AWS revenue grew 39% to $46 billion, marking the sixth consecutive quarter of accelerating growth. CEO Andy Jassy said the core compute and storage rental business is growing at its fastest pace in years and projected annual growth of over 40% for the next two years, partly fueled by demand from AI companies like OpenAI and Anthropic. However, analysts noted that AWS’s acceleration did not exceed inflated expectations or surpass the higher competitive benchmarks set by Microsoft and Google. Microsoft, which reported 48% cloud revenue growth while keeping capital spending in check, saw its shares dip less than 1%.
Meanwhile, online store sales grew just 2% to $68.5 billion, the slowest pace since early 2023. Amazon attributed part of the weakness to a timing shift for Prime Day, which moved from the third quarter to the second quarter in most major markets. But analysts cautioned that the adjustment does not fully explain the softness, suggesting that consumer stress may be becoming more evident. Advertising revenue grew 11%, the slowest rate since Amazon began disclosing the metric in 2020, down from over 20% growth in recent quarters.
Capital Expenditures Soar, Free Cash Flow Turns Negative
Amazon spent more than $77 billion on equipment and property in the third quarter, far exceeding expectations. Over the past 12 months, free cash flow was negative $42.4 billion, a reversal from positive $14.8 billion a year earlier, driven by a $94.8 billion increase in property and equipment purchases. The company maintained its forecast of roughly $220 billion in capital expenditures for 2026 but said spending will increase “significantly” in 2027.
The spending pace has unsettled investors. Even for a highly diversified company like Amazon, robust cloud growth has not been enough to offset concerns about the speed of AI investment. The fourth-quarter revenue guidance of $240 billion to $247 billion came in slightly below the midpoint of analyst expectations, while the operating income guidance range of $28.5 billion to $33.5 billion also had a lower bound below consensus.
Market Implications
The twin disappointments from Amazon and Alphabet signal a broader shift in investor sentiment toward Big Tech. The market is no longer rewarding AI investment at any cost; instead, it is demanding visible returns and disciplined spending. Companies that can demonstrate strong cloud growth with controlled capital expenditures—like Microsoft—are being rewarded, while those with aggressive spending plans and slowing core businesses are being punished.
For equity markets, this could lead to increased volatility in tech stocks as investors reassess valuations. The Nasdaq, heavily weighted toward mega-cap tech, may face pressure if more companies report similar trends. Bond markets could see safe-haven flows if equity weakness deepens, while the dollar may strengthen on risk-off sentiment. Cryptocurrencies, which have traded in tandem with tech stocks in recent months, could also experience contagion, particularly if the selloff broadens. Commodities, especially those tied to industrial demand like copper, may be affected if capital expenditure growth slows, though AI-related demand for data centers could provide a counterbalance.
Key Takeaways for Investors
- AI spending is under scrutiny: Investors are increasingly focused on the return on investment from massive AI capital expenditures. Companies with clear monetization paths and disciplined spending will outperform.
- Consumer weakness is emerging: The slowdown in Amazon’s retail and advertising businesses suggests that consumer spending may be under pressure, a potential warning sign for the broader economy.
- Cloud competition is intensifying: AWS’s growth, while strong, did not meet elevated expectations, highlighting the competitive threat from Microsoft and Google.
- Volatility is likely to persist: As more tech giants report earnings, expect continued market turbulence, with stock-specific reactions driven by spending plans and guidance.
- Diversification matters: The contrasting market reactions to Amazon, Alphabet, and Microsoft underscore the importance of focusing on fundamentals and avoiding overconcentration in any single narrative.
