Amazon (AMZN.US) Shares Plunge After Hours Following Google's Lead! Free Cash Flow Turns Negative by $42.4 Billion, AI Capital Expenditures Drag Cloud Giants into the Same Storm

According to Zhitong Finance APP, after the U.S. market closed on Thursday Eastern Time, Amazon (AMZN.US) released its Q3 FY2026 financial report: operating profit margin hit a record high of 13.9%, AWS revenue surged 39.3% year-on-year, marking the fastest growth in nearly five years, but single-quarter capital expenditures reached as high as $77.26 billion, far exceeding Wall Street expectations. Over the past twelve months, free cash flow turned from positive to negative, with an outflow of $42.4 billion, and management also forecasted that spending in 2027 would “increase significantly.” Due to this drag, Amazon's stock price plunged by over 11% in after-hours trading—just one day earlier, Google’s parent company Alphabet(GOOGL.US) suffered its largest single-day drop since going public, due to almost the same issue: “AI capital expenditures devouring cash flow.” The synchronized steep declines are prompting the market to reprice “massive AI capex” from “growth fuel” to “a questionable-return burden,” with effects spreading from individual stocks to the entire AI infrastructure value chain.

The earnings report shows that Amazon’s Q3 net sales were $201.94 billion, up 12% year-on-year, slightly below market expectations; diluted EPS was $1.89, down about 3% year-on-year and missing the expected $1.96. Net profit of $20.685 billion fell about 2%, mainly because a $9.5 billion pre-tax investment gain from Anthropic was included in the same period last year, raising the comparison base. The real highlight was profit quality: operating profit was $28.076 billion, up about 61% year-on-year, with the operating profit margin at its highest in company history at 13.9%.

By business segment, there is obvious divergence between cloud and retail. AWS net sales were $45.98 billion, up 39.3% year-on-year, the fastest single-quarter growth in nearly five years, with operating profit at $17.8 billion, up about 55%; North America sales grew 6%, and the international division grew by 5%. In contrast, retail and advertising were clearly weak: online sales grew just 2% to about $68.5 billion, the lowest growth rate since early 2023; advertising revenue grew 11% to $19.64 billion, the slowest pace since disclosure began in 2020. Management attributed retail slowdown to a scheduling effect from moving Prime Day forward to Q2 to avoid the July FIFA World Cup, stating that excluding this, Q3 revenue growth would be about 400 basis points higher.

The most crucial number: Free cash flow turns negative by $42.4 billion

What truly shook the market was not the slightly missing revenue or EPS, but the cash flow figures. The report showed Amazon’s trailing twelve month (TTM) operating cash flow grew to $168.3 billion, up 29% year-on-year (from $130.7 billion in the prior year), but free cash flow for the past twelve months turned from an inflow of $14.8 billion last year to an outflow of $42.4 billion.

This is the second consecutive quarter that Amazon recorded negative free cash flow. Last quarter, the company reported free cash flow of -$7.6 billion.

The company explicitly pointed out that this gap was “primarily due to property and equipment acquisitions (net of sales and incentives) increasing by $94.8 billion year-on-year,” mainly reflecting investment in AI.

Single-quarter capital expenditure is even more telling. According to the cash flow statement, Q3 spending on property and equipment was $77.26 billion, compared to $35.1 billion in the same period last year, far higher than analysts’ estimate of about $58.7 billion. This means Amazon spent more than double year-over-year on data centers, chips, and computing infrastructure in a single quarter, far exceeding Wall Street’s expectations.

This created the “earn more, spend even more” gap: the operating side keeps generating significant cash, but capex is swallowing it up at an even faster pace. Aptus Capital Advisors portfolio manager Dave Wagner stated that free cash flow “is the ugly part of this earnings report. Operations created a lot of cash, but capital expenditures completely devoured it,” calling this trend “quite steep and quite negative” and “the key alert in this report.”

Why negative cash flow led to a stock plunge

Amazon’s stock price already showed weakness before the earnings announcement: it fell $10.81, closing at $243.79 on Thursday regular trading, down 4.25%. After the report, its stock price once plunged over 11% after hours. Placing Amazon’s share price reaction in a broader time frame makes its significance clearer—earlier that same day, Google’s parent Alphabet also suffered its largest single-day drop since listing for nearly identical reasons.

On Wednesday after U.S. market close, Alphabet released its Q3 FY2026 report. It showed revenue of $127.58 billion (up 25% year-on-year), below the expected $128.2 billion; and net profit down about 24%-25%. More critically, free cash flow for the quarter was -$9.07 billion, negative for a second consecutive quarter (last quarter -$5.9 billion), far worse than analysts’ expectations of about -$2.7 billion; quarterly capital expenditures were $51.36 billion, more than double year-on-year.

This earnings report caused Alphabet’s stock to crash by over 13% intraday on Thursday, erasing over $500 billion in market cap in a single day, marking its biggest single-day drop since 2004 IPO.

Then in after-hours trading Thursday, Amazon followed with its own report, with free cash flow also turning negative at -$42.4 billion (TTM), and single-quarter capex at $77.26 billion exceeding estimates, resulting in a sharp stock decline.

In other words, during the Wednesday and Thursday trading days, the market witnessed two tech giants with trillion-dollar market caps taking massive hits because “AI capex is devouring free cash flow.” The two plunges resonated clearly—conveying to the market that the vast sums super-size cloud players pour into AI infrastructure are being revalued from “growth fuel” to “a burden with uncertain return.”

The key to this resonance is a common, quantifiable mechanism behind both companies’ cash flow issues: capital expenditure growth far outpaces operating cash flow growth. Amazon’s TTM operating cash flow grew 29%, but property and equipment acquisitions rose $94.8 billion year-on-year, directly causing free cash flow to turn negative; Google’s quarterly capex doubled year-on-year and its operating cash of about $42.3 billion could not cover it.

These spending figures also exceeded market expectations. Amazon’s quarterly capex was $77.26 billion, over 30% higher than analysts’ estimates of $58.7 billion; Google’s capex reached $51.36 billion, slightly below some estimates of $55.1 billion, but free cash flow (-$9.07 billion) was still much worse than the expected -$2.7 billion. What truly worries investors is the mismatch between the “speed of burning cash” and the “visibility of returns.”

Another source of concern for the market is the forward guidance from both tech giants to further boost spending through 2027. Neither has shown signs of slowing capital expenditures—Google’s CFO explicitly stated that 2027 capex will “increase significantly,” and Amazon’s CEO also expects 2027 spending to be “meaningfully more” than in 2026.

Amazon maintains $220 billion capex guidance, and signals “significant increase” in 2027

Contrary to the market’s expectation for a “brake,” Amazon’s report explicitly maintains the 2026 full-year cash capex guidance of about $220 billion unchanged. According to XTB research, given that Amazon spent about $172 billion cumulatively in the first three quarters, this annual guidance means that Q4 capex must either drop sharply from Q3’s $77.26 billion to about $48 billion, or full-year spending will overshoot guidance; thus, the research calls this assumption “relatively conservative.”

CEO Andy Jassy told analysts on the earnings call that he expects 2027 capex to be “meaningfully more” than 2026, adding that Amazon has “clear visibility into achieving attractive financial returns.” This is almost identical to Google’s CFO’s statement about 2027 capex “significantly increasing.”

At the same time, the spending discipline of super-scale cloud vendors is diverging. This week, another tech giant Microsoft (MSFT.US) lowered its full-year capex forecast from $175 billion to $170 billion. This divergence, combined with market anxiety after Alphabet’s 13% single-day plunge, is turning “can the returns of capex be realized” from an individual earnings event to a sector-wide variable affecting the entire AI infrastructure value chain (chips, servers, electricity, data centers).

A further structural background is that, according to Alphabet’s financials, its long-term debt has climbed significantly from the low levels of last year; Amazon’s long-term debt has risen to $173.1 billion (from about $65.6 billion last year), showing both companies are starting to borrow to fund the AI expansion phase.

Reports show that Alphabet has disclosed more than $1 trillion in future procurement commitments (covering data centers, equipment, energy, etc.), and has restarted an equity financing plan for the first time in decades while suspending annual stock buybacks. These changes mean the “cash-rich hyperscale cloud providers” are collectively shifting to a “capital-intensive” business model, with the cost now gradually appearing in their cash flow and balance sheets.

The core of the market’s disagreement: Can AWS’s “accelerated growth” cover “accelerated depreciation”?

AWS was the only and brightest highlight in this earnings report: revenue up 39.3% year-on-year, operating profit $17.8 billion, and operating margin improving to about 38.7%. Jassy emphasized in the earnings press release that “our investments in AWS capabilities and infrastructure are paying off,” and expects AWS revenue growth to “exceed 40%” in both 2027 and 2028; he also stated AWS could become a “trillion-dollar revenue business” within five to ten years.

But the market’s pricing is quite divided, and the substance of the dispute is: whether AWS’s improving margins can offset the accelerated depreciation, amortization, and the relentless rise in new capital expenditures?

Morgan Stanley listed Amazon as its top pick before the earnings release, raising the price target from $335 to $350, forecasting AWS revenue to grow 47% in 2027 and 42% in 2028, with AWS operating profit margin rising to 42% in 2027 and 44% in 2028. UBS also raised its target price to $348, but upped its 2027 Amazon capex forecast to more than $300 billion (from around $250 billion), highlighting that higher spending could “result in zero or negative free cash flow for 2027.”

In contrast, Emarketer analyst Sky Canaves pointed out that AWS’s accelerated growth “failed to meet raised expectations and lags behind the higher competitive benchmarks set by Microsoft and Google”; the cloud division’s margin improvement “may not be enough to ease concerns about the surge in capital expenditures and subsequent free cash flow collapse.”

XTB financial markets analyst Michał Jóźwiak believes the market’s reaction to the selling pressure is “exaggerated.” AWS’s 38.7% operating margin and $17.8 billion in quarterly operating profit, combined with management’s guidance for continued high growth, provide a solid basis for “eventually translating massive capex into profit growth.”

It’s worth noting that across these views, even the most optimistic Morgan Stanley scenario is based on the premise that “AWS revenue growth exceeds 40%”; while UBS, raising its target price, explicitly reveals the “negative free cash flow” risk. This shows that being bullish on AWS and bearish on cash flow are not logically contradictory—they are two sides of the same coin: the real debate is not about AWS demand, but the judgment of “the capital expenditure return cycle.”

Retail and advertisement slowdowns: Beyond Prime Day rescheduling, consumer signals need watching

In addition to the cash flow impact, the slowdown in Amazon's retail and advertising businesses has sparked discussions about U.S. consumer trends.

Online sales rose only 2% year-on-year to about $68.5 billion, below analyst estimates of roughly $69.7 billion, marking the slowest growth since early 2023. Advertising revenue up 11% to $19.64 billion, below consensus and the slowest since separate disclosure began in 2020.

Management and analysts disagree on the causes: Amazon attributes it mainly to the Prime Day rescheduling effect from Q3 to Q2; M Science analyst John Tomlinson believes the retail weakness “very likely” partly stems from this timing adjustment, which is a one-off disruption.

But Emarketer analyst Sky Canaves disagrees, saying the Prime Day rescheduling “cannot fully explain the weakness in online store and advertising growth,” possibly indicating “consumer pressures becoming more apparent as shoppers cut back wherever they can.”

Muted Q4 guidance adds more weight to this debate. Amazon expects Q4 net sales between $240 billion and $247 billion (up 12%-16% year-over-year), with the midpoint of about $243.5 billion below Wall Street’s $244.5 billion estimate; operating profit guidance is $28.5-$33.5 billion. By contrast, the National Retail Federation (NRF) earlier this month still forecast 4.2% year-on-year growth in total U.S. holiday sales. Whether Amazon’s relatively cautious holiday outlook is due to lingering Prime Day rescheduling effects or signals weakening U.S. consumer margins may need confirmation in Q4 data.

In summary, Amazon’s Q3 report is essentially a “high profit, negative cash flow” split: operating margins are at record highs, AWS is growing at its fastest pace in five years, but free cash flow is negative $42.4 billion, single-quarter capex is $77.26 billion beating expectations, and spending will “increase significantly” in 2027.

In the current environment, investors’ choice is clear—the market is focused on the latter. That’s why on October 29, the synchronized sell-off with Google amplified “AI capex devouring cash flow” from a single-company risk into a broader skepticism toward all hyperscale cloud vendors. When Microsoft gained a relatively positive response from investors for lowering its capex guidance, Amazon and Google’s “countercyclical expansion” is being read as even greater uncertainty of returns.