Amazon.com, Inc. (AMZN.US) follows in the footsteps of Alphabet Inc. Class C with a sharp after-hours plunge! Free cash flow turns negative at US$42.4 billion, as AI capital expenditure is dragging the cloud giants into the same storm

After the U.S. market close on Thursday Eastern Time, Amazon.com, Inc. (AMZN.US) released its fiscal 2026 third-quarter earnings report: operating margin hit a record high of 13.9%, AWS revenue surged 39.3% year-over-year, the fastest growth in nearly five years, but quarterly capital expenditure reached as high as US$77.26 billion, far exceeding Wall Street expectations, trailing-twelve-month free cash flow turned from positive to negative with an outflow of US$42.4 billion, and management guided that 2027 spending will "increase significantly." Dragged down by this, the stock plunged more than 11% in after-hours trading at one pointand just on the previous trading day, Alphabet Inc. Class C parent company Alphabet (GOOGL.US) had just recorded its largest single-day decline since listing for almost identical "AI capital expenditure devouring cash flow" issues. The two crashes resonated, and the market is repricing "massive AI capital expenditure" from "fuel for growth" to "a burden with questionable returns," with the impact already spreading from individual stocks to the entire AI infrastructure industry chain. The earnings report shows that Amazon.com, Inc.'s Q3 net sales were US$201.94 billion, up 12% year-over-year, slightly below market expectations; diluted earnings per share were US$1.89, down about 3% year-over-year, also missing the expected US$1.96. Net income was US$20.685 billion, down about 2%, mainly because the year-ago period included a US$9.5 billion pre-tax investment gain on Anthropic, raising the comparison base. The real highlight was earnings quality: operating income was US$28.076 billion, up about 61% year-over-year, and operating margin was 13.9%, the highest in the company's history. By segment, cloud and retail showed clear divergence. AWS net sales were US$45.98 billion, up 39.3% year-over-year, the fastest single-quarter growth in nearly five years, with operating income of US$17.8 billion, up about 55%; North America segment sales grew 6% and the international segment grew 5%. In contrast, retail and advertising were notably weak: online sales grew only 2% to about US$68.5 billion, the lowest growth since early 2023; advertising revenue grew 11% to US$19.64 billion, the slowest growth since separate disclosure began in 2020. Management attributed the retail slowdown to the timing shift of Prime Day moving into Q2 from Q3 to avoid the July FIFA World Cup, and said that excluding this effect, Q3 revenue growth would have been about 400 basis points higher. The most critical number: free cash flow turned negative at US$42.4 billion What truly shook the market in this earnings report was not the slight revenue or EPS miss, but the cash flow data. The report shows that although Amazon.com, Inc.'s trailing-twelve-month (TTM) operating cash flow increased to US$168.3 billion, a year-over-year growth rate of 29% (US$130.7 billion in the year-ago period), TTM free cash flow turned from an inflow of US$14.8 billion in the year-ago period to an outflow of US$42.4 billion. This is the second consecutive quarter in which Amazon.com, Inc. recorded negative free cash flow. In the previous quarter, the company recorded free cash flow of -US$7.6 billion. The company explicitly stated that this shortfall was "primarily due to a US$94.8 billion year-over-year increase in purchases of property and equipment, net of proceeds from sales and incentives," and that this increase "primarily reflects investments in AI." Quarterly capital expenditure is even more. According to the company's cash flow statement, Q3 purchases of property and equipment were US$77.26 billion, compared with US$35.1 billion in the year-ago period, far above analysts' estimate of about US$58.7 billion. This means that in a single quarter, Amazon.com, Inc. spent more than double what it spent in the same period last year on data centers, chips, and computing infrastructure, and significantly exceeded Wall Street expectations. The gap of "earning more, spending even more" was thus formed: the operating side is still generating substantial cash, but capital expenditure is devouring it at a faster pace. Aptus Capital Advisors portfolio manager Dave Wagner said free cash flow "is the ugly part of this report. Operations generated a lot of cash, but capex completely consumed it," and said the trend is "quite steep and quite negative" and is "the key alarming takeaway in this report." Why negative cash flow triggered a sharp stock decline Amazon.com, Inc.'s stock had already shown weakness before the earnings release: in Thursday's regular session it fell US$10.81 to close at US$243.79, down 4.25%. After the earnings release, it plunged more than 11% in after-hours trading at one point. The significance of Amazon.com, Inc.'s stock reaction only truly stands out when placed in a larger time frameearlier on the same trading day, Alphabet Inc. Class C parent company Alphabet suffered its largest single-day decline since listing for almost exactly the same reason. It is understood that after the U.S. market close on Wednesday Eastern Time, Alphabet released its fiscal 2026 third-quarter earnings report. The report showed revenue of US$127.58 billion (+25% year-over-year), below the expected approximately US$128.2 billion; net income fell about 24%-25% year-over-year. The more critical cash flow data: third-quarter free cash flow was -US$9.07 billion, negative for the second consecutive quarter (-US$5.9 billion in the previous quarter), far worse than analysts' expectation of about -US$2.7 billion; quarterly capital expenditure was US$51.36 billion, more than double year-over-year. This earnings report caused Alphabet's stock to plunge more than 13% at one point during Thursday's session, wiping out more than US$500 billion in market value in a single day, the largest single-day decline since its 2004 listing. Then in Thursday's after-hours session, Amazon.com, Inc. followed with its earnings report, with free cash flow also turning negative to -US$42.4 billion (TTM basis), quarterly capital expenditure of US$77.26 billion exceeding expectations, and the stock fell accordingly. In other words, during the two trading days of Wednesday and Thursday, the market witnessed two trillion-dollar technology giants being hit hard one after another for the same logic: "AI capital expenditure is devouring free cash flow." The two plunges formed a clear resonancethe signal it sent to the market is that the massive capital that hyperscale cloud providers are investing in AI infrastructure is being repriced from "fuel for growth" to "a burden with questionable returns." The key to this resonance is that the cash flow problems of the two companies share a common, quantifiable mechanism: capital expenditure growth far outpaces operating cash flow growth. Amazon.com, Inc.'s TTM operating cash flow grew 29%, but purchases of property and equipment increased by US$94.8 billion year-over-year, directly causing free cash flow to turn negative; Alphabet Inc. Class C's quarterly capital expenditure doubled year-over-year, and the approximately US$42.3 billion in cash generated from operations could not cover it. These spending figures also exceeded market expectations. Amazon.com, Inc.'s quarterly capital expenditure of US$77.26 billion was more than 30% above analysts' estimate of US$58.7 billion; although Alphabet Inc. Class C's capital expenditure of US$51.36 billion was slightly below some estimates of about US$55.1 billion, free cash flow (-US$9.07 billion) was still far worse than the expected about -US$2.7 billion. What truly unsettled investors was the mismatch between "the speed of burning cash" and "the visibility of returns." What also worried the market more was the forward guidance from these two technology giants that they will continue to step up in 2027. Neither company released a signal of slowing capital expenditureAlphabet Inc. Class C's CFO explicitly stated that capital expenditure will "increase significantly" in 2027, and Amazon.com, Inc.'s CEO also expects spending in 2027 to "increase significantly" compared with 2026. Amazon.com, Inc. maintains US$220 billion capital expenditure guidance and forecasts "significant increase" in 2027 Contrary to market hopes for "hitting the brakes," Amazon.com, Inc. explicitly maintained its full-year 2026 cash capital expenditure guidance of about US$220 billion unchanged in the earnings report. According to an XTB research report, given that Amazon.com, Inc. had already spent about US$172 billion cumulatively in the first three quarters, this full-year guidance implies that fourth-quarter capital expenditure must either fall sharply from US$77.26 billion in Q3 to about US$48 billion, or the full-year guidance will be overshot, which is why the institution called this assumption "relatively conservative." CEO Andy Jassy told analysts on the conference call that he expects capital expenditure in 2027 to be "meaningfully more" than in 2026, while saying Amazon.com, Inc. has "a clear line of sight to attractive financial returns." This statement was almost identical to Alphabet Inc. Class C's CFO's remark that capital expenditure will "increase significantly" in 2027. At the same time, capital expenditure discipline among hyperscale cloud providers is diverging. This week, another technology giant, Microsoft Corporation (MSFT.US), lowered its full-year capital expenditure forecast from US$175 billion to US$170 billion. This divergence, combined with the market anxiety triggered by Alphabet's more than 13% single-day plunge after its earnings report, is amplifying the question of "whether capital expenditure returns can be delivered" from an individual earnings event into a sector-wide variable affecting risk appetite across the entire AI infrastructure industry chain (chips, servers, power, data centers). A structural background worth adding is that, according to Alphabet's earnings disclosure, its long-term debt has risen significantly from a low base last year; Amazon.com, Inc.'s long-term debt has also risen to US$173.1 billion (about US$65.6 billion last year), indicating that both companies have begun to rely on debt to support funding needs during the AI expansion period. According to reports, Alphabet has cumulatively disclosed more than US$1 trillion in future purchase commitments (covering data centers, equipment, energy, etc.), and has restarted its first equity financing plan in decades while suspending annual share buybacks. These changes mean that "cash-rich hyperscale cloud providers" are collectively shifting to a "capital-intensive" operating model, and the cost is gradually showing up in cash flow and balance sheets. The core of market divergence: can AWS's "accelerating growth" cover "accelerating depreciation"? AWS is the only and most dazzling bright spot in this earnings report: revenue +39.3% year-over-year, operating income of US$17.8 billion, and operating margin improved to about 38.7%. Jassy emphasized in the earnings press release that "our investments in AWS functionality and infrastructure are working," and expects AWS revenue growth to "exceed 40%" in both 2027 and 2028; he also said AWS is expected to become a "trillion-dollar revenue business" within the next five to ten years. But the market's pricing of it has clearly diverged, and the essence of the divergence is: can AWS's margin improvement cover accelerating depreciation and amortization, as well as continuously rising incremental capital expenditure? Morgan Stanley named this technology giant a top pick before Amazon.com, Inc.'s earnings release, raising its target price from US$335 to US$350, forecasting AWS revenue growth of 47% in 2027 and 42% in 2028, with AWS operating margin rising to 42% in 2027 and 44% in 2028. UBS Group AG also raised its target price to US$348, but at the same time raised its Amazon.com, Inc. 2027 capital expenditure forecast to more than US$300 billion (previously about US$250 billion), and explicitly stated that higher spending "could make 2027 free cash flow zero or negative." By contrast, Emarketer analyst Sky Canaves noted that AWS's accelerating growth "failed to meet elevated expectations and fell short of the higher competitive bar set by Microsoft Corporation and Alphabet Inc. Class C," and that the cloud unit's margin improvement "may not be enough to ease concerns about the capex surge and the resulting free cash flow plunge." XTB financial markets analyst Micha Jwiak argued that the market's reaction to the selling pressure was "overdone," and that AWS's 38.7% operating margin and US$17.8 billion in quarterly operating income, combined with management's continued guidance for high AWS growth, provide a solid basis for "massive capital expenditure ultimately translating into earnings growth." It is worth noting that among the above views, even the most optimistic Morgan Stanley's bullish logic is built on the premise of "AWS revenue growth exceeding 40%"; while UBS Group AG, while raising its target price, precisely revealed the risk exposure of "free cash flow turning negative." This shows that being bullish on AWS and bearish on cash flow are not logically contradictory, but two sides of the same cointhe essence of institutional divergence is the judgment on the "capital expenditure return cycle," not on AWS demand itself. Slowdown in retail and advertising: beyond the Prime Day timing shift, consumer signals remain to be observed In addition to the cash flow shock, the slowdown in Amazon.com, Inc.'s retail and advertising businesses also sparked discussion about U.S. consumption. Online sales grew only 2% year-over-year to about US$68.5 billion, below analysts' estimate of about US$69.7 billion, the lowest growth since early 2023. Advertising revenue rose 11% year-over-year to US$19.64 billion, below consensus, the slowest growth since separate disclosure began in 2020. Management and analysts differ on the attribution of the slowdown: Amazon.com, Inc. attributed the main reason to the timing shift of Prime Day moving to Q2 from Q3; M Science analyst John Tomlinson believes the relative weakness in retail "likely" partly stems from this schedule adjustment and is a one-off disturbance. But Emarketer analyst Sky Canaves took a different view, arguing that the Prime Day timing shift "does not fully explain the weakness in online store and advertising growth," and that it may indicate "consumer pressure is becoming more evident as consumers cut back where they can save." The dim fourth-quarter guidance addssupporting evidence to this divergence. Amazon.com, Inc. expects fourth-quarter net sales of between US$240 billion and US$247 billion (12%-16% year-over-year growth), with a midpoint of about US$243.5 billion, below Wall Street's expectation of about US$244.5 billion; operating income guidance is US$28.5 billion to US$33.5 billion. By comparison, the National Retail Federation (NRF) earlier this month still forecast total U.S. holiday season sales to grow 4.2% year-over-year. Whether Amazon.com, Inc.'s relatively cautious holiday season outlook is a lagging effect of the Prime Day timing shift or a leading signal of marginal weakening in U.S. consumption may still need fourth-quarter actual data as a verification anchor. Overall, Amazon.com, Inc.'s third-quarter report is essentially a torn earnings report of "high profit, negative cash flow": operating margin at a record high, AWS growth the fastest in nearly five years, but free cash flow turned negative at US$42.4 billion, quarterly capital expenditure of US$77.26 billion exceeded expectations, and 2027 will see a "significant increase." And in the current environment, investors' choice is clearthe market places more weight on the latter. This choice resonated on the same day as Alphabet Inc. Class C's plunge on October 29, amplifying "AI capital expenditure devouring cash flow" from a single-company risk into doubts about the entire group of hyperscale cloud providers. When Microsoft Corporation received a relatively positive investor response for lowering its capital expenditure guidance, Amazon.com, Inc. and Alphabet Inc. Class C's "stepping up against the trend" was interpreted by the market as greater return uncertainty.