Third-quarter net sales rose 13% excluding currency moves to $202bn (as expected). AWS was again the standout, up 39% to $46.0bn.
Operating profit rose 61% to $28.1bn ($26.2bn expected), reflecting the group's highest-ever operating margin. Strong AWS growth and improving retail profitability both contributed.
Free cash flow fell to an outflow of $42.4bn on a trailing twelve-month basis, down from an inflow of $14.8bn a year ago. That was mainly driven by investment in AI infrastructure. Net debt, including leases, stands at $157.7bn.
For the fourth quarter, net sales are expected to be between $240-247bn, up 12-16%. Operating profit is expected to be between $28.5-33.5bn.
The shares were down 6.8% in early trading.
Our view
Amazon's third quarter was better than the initial share price reaction suggests. AWS fell short of the market's loftiest hopes, but record profitability and a punchy long-term cloud outlook show the investment case is moving in the right direction.
AWS remains the key profit engine and clearest route for Amazon to benefit from AI. Growth stepped up for a sixth straight quarter, and management now expects it to run above 40% in both 2027 and 2028, well ahead of market expectations. Margins improved too, so growth isn't coming at the expense of profitability.
Demand looks broad-based. The backlog of customer commitments grew sharply again, coming from a wide mix of customers rather than a handful of AI labs. Amazon's AI services and custom chips are scaling quickly, and usage of its Bedrock AI platform is soaring among the largest businesses. Plans to sell its chips externally from late 2027 add another growth avenue.
Retail is in much better shape than a few years ago. Margins are improving on both sides of the Atlantic, helped by faster delivery and automation. Grocery and same-day delivery are encouraging customers to shop more often, and Prime remains a powerful retention tool.
Advertising growth slowed this quarter, reviving debate over whether AI shopping tools could change how people find products. Management dismissed the concern and expects growth to pick back up in the fourth quarter. We're inclined to agree, as Amazon's data and placement close to the point of purchase are hard to replicate.
The trade-off is investment. Capital spending of around $220bn this year is set to rise meaningfully again in 2027, and the debate has shifted from whether spending rises to how far it needs to go. Demand still exceeds available capacity, but depreciation will climb and free cash flow is firmly negative.
Amazon is also leaning more heavily on debt markets to supplement its own cash generation. Its balance sheet has room to flex, so for now this is more something to monitor than worry about.
All in, we think the market is focused on short-term noise rather than the long-term story. AWS momentum, improving retail profitability and a strong advertising business support healthy earnings growth ahead. After the pullback, the shares trade at around 22x expected earnings, a level we see as attractive for a business of this quality.
The scale of investment is the key risk. If AI demand cools before the new capacity is filled, returns would suffer and free cash flow could stay under pressure for longer.
Environmental, social and governance risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Amazon’s overall management of material ESG issues is strong.
There are no significant ongoing risk events, and ESG reporting is fully aligned with industry best practice. Amazon provides good detail on how it manages major business risks, including data privacy, cybersecurity and human rights across its supply chain. However, think there is scope for stronger oversight of the environmental and social impact of its products, as well as how it manages water use.
The author holds shares in Amazon.
Amazon key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.