AWS grows 39%, its fastest in nearly five years, but Amazon misses as AI spending drains cash

The skim

• AWS grew 39% to $46 billion in the third quarter, its fastest growth in nearly five years. Andy Jassy says it can grow more than 40% in both 2027 and 2028.
• Amazon overall missed: $1.89 a share on $201.9 billion in sales, versus $1.96 and $202.31 billion expected, per LSEG. Ads and online stores also came in light.
• AI spending pushed free cash flow to an outflow of $42.4 billion over 12 months. Shares fell nearly 7% in premarket trading Friday, according to CNBC.

What Amazon reported

Amazon Web Services brought in $45.98 billion in the quarter that ended Sept. 30, up 39.3% from a year earlier and ahead of the $45.29 billion analysts expected, according to CNBC. That's up from about 37% growth in the second quarter and the cloud unit's fastest pace since late 2021. AWS operating income rose 55% to $17.8 billion, and Amazon put the business at a $184 billion annual revenue run rate.

The rest of the company was softer. Total sales rose 12% to $201.9 billion, and Amazon says growth would have been about four points higher if Prime Day hadn't moved into the second quarter this year. Ad revenue rose 11% to $19.64 billion, short of the $20.82 billion StreetAccount expected, and online store sales grew just 2%. Net income slipped to $20.7 billion from $21.2 billion, mostly because last year's quarter included a $9.5 billion gain on Amazon's Anthropic stake. Operating income still jumped to $28.1 billion, a record 13.9% margin.

Why it matters

This is the third big cloud report in two days with the same shape: demand is accelerating, and so is the bill. Microsoft said Azure topped $33 billion in a quarter, and Alphabet's cloud more than doubled even as its stock sank on a rare miss. Amazon is spending hardest. It still expects about $220 billion in capital spending this year, and Jassy said it will "spend meaningfully more in 2027." Trailing free cash flow swung from a $14.8 billion inflow a year ago to a $42.4 billion outflow.

Investors had hoped for more from AWS. Several analysts told clients the buy side was looking for growth in the low 40s, CNBC reported, which is why a 39% quarter still disappointed. Morgan Stanley's Brian Nowak called it "mostly an expectations miss."

What's next

For the holiday quarter, Amazon guided to $240 billion to $247 billion in sales; the midpoint is below the $244.5 billion analysts expected, per LSEG. It expects operating income of $28.5 billion to $33.5 billion. Two longer bets stood out on the call: Jassy said Amazon will sell its Trainium AI chips outside AWS "late in 2027," taking a page from Google's TPU playbook, and he said AWS could be a trillion-dollar revenue business in five to 10 years.

Sources: Amazon, CNBC (results), CNBC (AWS) and CNBC (analysts).