Amazon’s cloud roars back, but a $77bn spending quarter drains the till

MUMBAI: Amazon has just posted the highest operating margin in its history. In the same release it reported a free cash outflow of $42.4bn over twelve months. Both facts are true, and the second pays for the first.

Net sales rose 12 per cent to $201.9bn. Operating income jumped 61 per cent to $28.1bn, a margin of 13.9 per cent against 9.7 per cent a year ago. Net income slipped 2 per cent to $20.7bn, or $1.89 a share, from $1.95. The culprit is a windfall that did not repeat. Last year’s quarter carried $9.5bn of pre-tax gains on Amazon’s Anthropic stake. This time, other income was a loss of $703m, against a gain of $10.2bn. Operating profit, which ignores such things, tells the cleaner story.

The sales number also undersells the quarter. Prime Day moved into the second quarter for most large countries, having fallen wholly in the third last year. Amazon says that shift cost about 400 basis points, which puts underlying growth near 16 per cent. A weaker currency took another $0.9bn off, so growth excluding exchange rates was 13 per cent.

The cloud does the heavy lifting

AWS sales grew 39 per cent to $46.0bn, its fastest pace in nearly five years. That is an annual run rate of $184bn. The business added $13bn of quarterly sales in a year. Growth excluding currency effects has climbed from 17 per cent in the second quarter of 2025 to 20, 24, 28, 37 and now 39 per cent.

Profit followed. AWS operating income rose 55 per cent to $17.8bn, and the margin reached 38.7 per cent against 34.6 per cent a year earlier. It did dip from 39.4 per cent in the second quarter, as depreciation piles up. AWS is 23 per cent of Amazon’s sales but 63 per cent of its operating income. The two retail segments together made $10.3bn.

Andy Jassy, the chief executive, says AWS should grow by more than 40 per cent in both 2027 and 2028. He adds that the world has never seen a trillion-dollar revenue business and Amazon may end up with two of them within five to ten years. The customer data give him some cover. Token volume on Bedrock, the inference service, grew nearly 17 times, and Fortune 500 firms spend nearly seven times more on it. AgentCore customers deployed twice as many agents in the quarter as in the previous three quarters combined. Lambda crossed a $1bn run rate.

Shops get fatter, not faster

North America sales rose 6 per cent to $112.9bn. Operating income almost doubled to $8.7bn from $4.8bn, lifting the margin to 7.7 per cent from 4.5 per cent. International sales rose 5 per cent to $43.1bn, or 8 per cent without currency effects. Operating income was $1.6bn against $1.2bn, a margin of 3.7 per cent against 2.9 per cent.

Online stores grew just 2 per cent to $68.5bn, which is where the Prime Day hole shows. Third-party seller services brought in $46.5bn, up 9 per cent. Subscriptions rose 11 per cent to $14.0bn and physical stores 2 per cent to $5.7bn. The small “other” line, which includes healthcare services and co-branded cards, grew 16 per cent to $1.6bn. Paid units rose 12 per cent, and sellers account for 61 per cent of them. Services now make up 63 per cent of net sales, at $126.6bn, up 19 per cent. Product sales were $75.3bn, up 2 per cent.

Advertising and marketing: revenue wobbles, spending shrinks

Advertising revenue was $19.6bn, up 11 per cent, or 12 per cent excluding currency effects. That is a sharp slowdown from the 22 per cent it managed for four straight quarters, and 26 per cent in the second quarter. Amazon blames Prime Day timing and a couple of other timing quirks, and expects high-teens growth in the fourth quarter. Shoppers are being offered Amazon Ads Agent, which now runs full-funnel campaigns across sponsored ads, display, video and streaming television for all American advertisers.

The spending side is more striking. Sales and marketing expense was $11.65bn, flat on last year’s $11.69bn, and it fell to 5.8 per cent of sales from 6.5 per cent. Over nine months it is $33.7bn, up just 2.4 per cent while sales grew 16 per cent. Advertising revenue is now about 1.7 times the marketing bill, though the expense line also holds sales staff costs, so the comparison is rough. Stock-based pay inside marketing fell 8 per cent to $762m. Amazon is spending less to sell more.

Where the money goes

Cost of sales was $94.6bn, up 7 per cent, and shrank to 46.8 per cent of sales from 49.2 per cent. Fulfilment cost $30.0bn, up 8 per cent, or 14.9 per cent of sales against 15.4 per cent. Shipping costs, which sit inside those lines, rose 11 per cent to $28.3bn. General and administrative costs fell 6 per cent to $2.7bn. Other operating expense collapsed to $134m from $2.9bn.

The one big line that grew faster than sales is technology and infrastructure, up 20 per cent to $34.8bn, or 17.2 per cent of sales against 16.1 per cent. Depreciation rose 25 per cent to $20.9bn. Total stock-based pay was $5.4bn, up 12 per cent. Headcount reached 1.638m, up 4 per cent and about 60,000 more than a year ago. Amazon plans to hire more than 300,000 seasonal and permanent staff for the holiday season and is spending over $1.5bn to lift minimum starting pay to $20 an hour.

Cash goes out faster than it comes in

Operating cash flow was $42.4bn in the quarter, up 19 per cent, and $168.3bn over twelve months, up 29 per cent. Spending on property and equipment was $77.3bn, more than twice last year’s $35.1bn. After $1.4bn of proceeds from sales and incentives, that leaves a single-quarter free cash outflow of about $33.5bn, against a small inflow a year earlier. Over twelve months, net capital spending was $210.7bn, up 82 per cent, which turns free cash flow from an inflow of $14.8bn into that $42.4bn outflow.

Amazon still guides to about $220bn of cash capital spending for the full year. Spending was $175.7bn over the first nine months, so simple arithmetic points to roughly $44bn in the fourth quarter, far below the third. Amazon defines the figure its own way, so treat that as a rough read.

The gap was filled with borrowing. Long-term debt stands at $173.1bn, against $65.6bn at the end of December. Amazon raised $48.1bn in the quarter and $115.1bn so far this year. Interest expense tripled to $1.69bn from $0.54bn, and cash interest paid rose to $1.17bn from $0.25bn. Cash and marketable securities together fell to $114.2bn from $123.0bn, with cash alone down to $55.8bn from $86.8bn. Deduct long-term debt and the net position is about $59bn in the red, before counting short-term debt and leases.

The balance sheet has ballooned. Total assets are $1.24tn, up from $818bn. Net property and equipment is $508.9bn, up 43 per cent since December. Other assets leapt to $358.8bn from $122.6bn, and accumulated other comprehensive income to $102.3bn from $28.2bn, on unrealised gains in the investment portfolio. Equity rose to $613.6bn from $411.1bn. Cash spent on acquisitions and non-marketable investments was $24.0bn in the quarter and $63.8bn for nine months. Receivables rose to $98.2bn from $67.7bn, payables to $158.7bn from $121.9bn, and inventory to $42.6bn from $38.3bn.

The taxman took $6.2bn, an effective rate of about 23 per cent against 24.5 per cent. Diluted shares edged up 0.8 per cent to 10.93bn. Over twelve months, earnings per share are $12.37 and net income $134.8bn, helped by $68.4bn of other income in the first nine months, which is mostly investment gains.

The rest of the portfolio

Zoox now runs robotaxis in 12 American cities and charges fares in Las Vegas. Amazon Leo, the satellite service, is on track to start later this year, with AT&T signed as a first big telecom partner. Alexa for Shopping was used by more than 400m customers in the past year. Amazon Now, the ultra-fast delivery service, is in over 450 towns and cities. Prime Video’s Thursday Night Football averaged 17.7m viewers. Amazon also announced a $1bn community fund for places that host its data centres. None of this moves the numbers yet.

What next

For the fourth quarter Amazon expects net sales of $240bn to $247bn, up 12 to 16 per cent, with a 60 basis point currency drag. Operating income is guided at $28.5bn to $33.5bn, against $25.0bn a year ago. That implies a margin of roughly 12 to 14 per cent, so the record may not be broken at the holiday peak. Amazon flags memory-chip supply, energy prices and tariffs as risks.

The bet is plain. Amazon is borrowing heavily and spending at a rate that wipes out its cash, on the belief that AWS keeps growing near 40 per cent. For now, the AWS figures say that belief is being paid back.