Amazon's $42 Billion Cash Burn: AI Gamble or Red Flag?

Amazon reported third-quarter results that showed impressive growth in its cloud business but also revealed a troubling trend in cash flow. The company spent $77.3 billion on property and equipment, more than double the $35.1 billion from a year earlier, as it races to build out AI infrastructure.

That spending helped Amazon Web Services (AWS) deliver 39% year-over-year revenue growth, its best in almost five years, reaching $46.0 billion. AWS generated $17.8 billion in operating profit, accounting for 63% of Amazon's total operating income. CEO Andy Jassy expects AWS to grow more than 40% in both 2027 and 2028, noting that capacity is 'largely sold out' for next year.

However, companywide sales rose 12% to $201.9 billion, and earnings per share came in at $1.89, down from $1.95 a year earlier. Both figures missed Wall Street's targets. Amazon noted that shifting Prime Day out of Q3 left about 4 percentage points of revenue growth on the table, and last year's EPS benefited from a $9.5 billion pretax gain on its Anthropic stake.

The bigger concern was cash flow. Free cash flow (FCF) turned negative $42.4 billion over the past 12 months, compared to a positive $14.8 billion a year prior. The company still plans to spend about $220 billion on capital expenditures in 2026, and it raised $48.1 billion in long-term debt during the quarter, bringing total long-term debt to $173.1 billion, up from $65.6 billion at the end of 2025.

The shift from positive to negative free cash flow is significant because it means Amazon is spending more cash than it generates, funding its AI ambitions with debt. While debt is cheap and Amazon has ample capacity to borrow, the trend is worth watching. If AI demand doesn't materialize as expected, the company could be left with expensive infrastructure and a stretched balance sheet.

Amazon is not alone in this spending spree. Microsoft and Alphabet also reported strong cloud growth tempered by massive spending. But there's a key difference: Microsoft still has positive free cash flow, while Alphabet's FCF swung to a $9.1 billion outflow from a $24.5 billion inflow a year earlier. This suggests that Amazon and Alphabet are more aggressive in their spending, which could pay off if AI demand surges, but also carries more risk.

A significant portion of the demand for AI cloud services comes from AI labs like Anthropic and OpenAI. These companies are driving growth but their own revenue trajectories are uncertain. If their growth cools, hyperscalers may struggle to recoup their investments. The author expresses skepticism about the reliability of this demand, noting that there are already signs of cooling.

Investors need to weigh the potential rewards of AWS's rapid growth against the risks of negative free cash flow and rising debt. The stock's reaction (down 4.25%) suggests that the market is concerned about these issues, at least in the short term.