Amazon's earnings in the wake of the AI bubble; I'm running the NYC Marathon on Sunday, my 60th birthday
Over the past two weeks, I've been laying out my case that the AI build-out is a bubble and it's in the process of bursting. Don't say I didn't warn you, as today marks another ugly day for tech/AI stocks.
While I continue to like the hyperscalers, I've warned that even the sector's long-term winners could see pullbacks as the bubble bursts. Sure enough, Meta Platforms (META) and Alphabet (GOOGL) got whacked earlier this week.
Now, it's Amazon's (AMZN) turn...
The stock was down 1% to 2% this morning after reporting third-quarter earnings yesterday evening (see the earnings release here and slide presentation here).
Revenues rose 12% year over year ("YOY") to $201.9 billion, slightly missing estimates of $202.3 billion. Adjusting for Prime Day shifting from the third quarter last year to the second quarter this year, growth was 16%.
Earnings per share ("EPS") of $1.89 also missed expectations of $1.97. But this is misleading, as last year's third quarter included a $9.5 billion noncash, pretax gain on Amazon's investment in Anthropic.
A more relevant metric of profitability is operating income, which soared 61%. That's thanks to operating margin expanding to an all-time high of 13.9%, far above last year's 9.7%.
The big story was Amazon Web Services ("AWS"), which saw revenues surge 39.3% – its fastest growth in nearly five years, putting it at a $184 billion annualized run rate.
CEO Andy Jassy doesn't see any slowdown for years to come, as he guided for AWS revenue growth of more than 40% for both 2027 and 2028. He noted, "There has never been a trillion dollar revenue business, and we may have two of them in the next 5-10 years."
Operating income for the segment was $17.8 billion, up 56% and beating expectations of $17 billion. Though AWS only accounts for 23% of Amazon's revenues, it now generates 63% of its operating income. And operating margin was 38.7%.
AWS's backlog is $578 billion, up 16% sequentially and more than double from a year ago.
The rest of the business – the North American and International segments – grew revenues 6% combined. Again, this was impacted by the shift in Prime Day. Operating margins expanded from 4.1% to 6.6%, resulting in a 72% jump in operating income.
Advertising revenues came in at $19.6 billion, up 12% and missing expectations of 18%. But management attributed this to timing anomalies primarily related to Prime Day and expects ad growth to return to the high teens in the fourth quarter.
Guidance for the fourth quarter was solid, with expected revenue of $240 billion to $247 billion, up 12% to 16%. And operating income is expected to be $28.5 billion to $33.5 billion – the midpoint up 24% from $25 billion a year ago.
Overall, it was an excellent quarter – with strong revenue growth and rapidly expanding margins, resulting in exploding profits.
So, why is the stock down?
Like its hyperscaler peers, Amazon is spending huge amounts of capital expenditures ("capex") to keep up in the AI race...
While cash flow from operations rose 19.4% to $42.4 billion, capex more than doubled to $77.3 billion. That resulted in free cash flow ("FCF") of negative $34.9 billion.
Oddly, Amazon didn't change its $220 billion capex guidance for the year. But with the past nine months' capex at $176 billion, this implies only $44 billion of capex in the fourth quarter. Maybe spending was pulled forward in the third quarter and/or Amazon's spending will be higher than $220 billion for the year.
In any case, Jassy said 2027 capex will be "meaningfully more," so the trajectory is still clearly upward.
To fund this, Amazon is rapidly taking on more debt – more than $100 billion this year, as you can see in this chart:
This isn't a dangerous level of debt by any means – Amazon's trailing-12-month cash flow from operations is $168.3 billion. But investors are rightly wondering how long this negative trend will continue...
As for valuation, with the stock around $238 this morning, it's trading at only 22.7 times 2027 consensus analysts' estimates of $10.50. That's roughly a market multiple for a far above-average business, which makes no sense.
It's also an all-time-low forward price-to-earnings (P/E) multiple for the stock, as you can see in this chart from the past decade:
In my January 7 e-mail, I said Amazon was my favorite big-cap tech stock for 2026. Since then, even with today's drop, it's up a little more than 5% – and my opinion hasn't changed.
Like some of the other hyperscalers, Amazon could be one of the few winners that survive the AI bubble. And my friend Jeff Brown, founder of Brownstone Research, has identified another...
This company's AI "super chip" is 50 times faster than Nvidia's (NVDA) and has the power to change the lives of millions of Americans. Better yet, it could open the opportunity of the decade for investors who get in before November 5.
Earlier this week, I sat down with Jeff to discuss this breakthrough. But if you missed our presentation, don't worry – you can watch a replay right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. To celebrate my 60th birthday on Sunday (and to prove I'm still young), I've planned the perfect day: I'm running the New York City Marathon in the morning to raise money for New York's largest poverty-fighting organization, Robin Hood. Afterward, I'll go directly to a big party with 100-plus friends and family.
You can track me on the New York Road Runners app – I'm bib number 23474. If you're a spectator, I'll be wearing this shirt that my wife Susan made for me:
I did my last long training run this past Sunday with some of the 83 others running for Robin Hood, covering the last 10-plus miles of the course:
On Thursday, I bought the Adidas "super shoe" – the Adizero Adios Pro Evo 3 – that two runners wore earlier this year to break the two-hour marathon record. They cost $544 with tax (yikes!), but I need all the help I can get.
They've been sold out forever, but a friend learned that the Adidas flagship store was getting 42 pairs that day. So I got in line at 9:30 a.m. and grabbed a pair as soon as the store opened at 10:00. Then I biked over to the Javits Center (which was a madhouse) to pick up my bib and buy some bling – check out the hat and yellow jacket:
Afterward, I stopped briefly at home to put on my running clothes and took my new shoes out for a brisk three-mile run in the park – they were amazing. At 97 grams, they're half the weight of the Puma Nitro Elite 3 shoes that I ran the marathon in last year. You wouldn't believe how light they are.
The Pumas are fantastic race shoes, but the Adidas are another level – I could feel the difference. Or maybe it was just in my head, but who cares – the placebo effect is real!