Amazon (AMZN -4.25%) spent $77.3 billion on property and equipment in the third quarter, more than twice the $35.1 billion it spent a year earlier, according to the tech giant’s latest earnings report released earlier today.
That spend helped Amazon Web Services (AWS), the company’s cloud business, deliver its best growth in almost five years — 39% year over year — but investors are still weighing whether they’re comfortable with the enormous scale of AI capital expenditures.
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Amazon earnings: free cash flow loss and rising debt
Companywide sales rose 12%, reaching $201.9 billion, while earnings per share (EPS) came in at $1.89, less than the $1.95 per share earned a year earlier. Both figures were below Wall Street’s targets, though Amazon says shifting its massive “Prime Day” sale out of Q3 left about 4 percentage points of revenue growth on the table. And on the bottom line, the EPS hit was partly due to an unusually strong Q3 last year when the company recorded a $9.5 billion pretax gain on its stake in Anthropic, the maker of Claude.
The real concern, in my view, was cash flows. After accounting for its investments, the company was left with a free cash flow (FCF) loss of $42.4 billion over the past 12 months. A year prior, that was a $14.8 billion gain. The company still expects to spend about $220 billion on capital expenditures in 2026, so cash will still be flowing out of the door — before any borrowing, which the company is doing quite a bit of.
The company raised $48.1 billion in long-term debt during the quarter. Its total long-term debt rose from $65.6 billion at the end of 2025 to $173.1 billion. Take a look at the chart below showing that growth.
Image source: Getty Images.
Amazon Web Services growth and the cloud spending race
With some of that spending paying off, AWS was really the star, reaching $46.0 billion in revenue and delivering a $17.8 billion operating profit — 63% of the company’s total operating income. CEO Andy Jassy expects AWS to grow more than 40% in both 2027 and 2028 as capacity is still “largely sold out” for next year.
Amazon isn’t alone in spending big to meet cloud demand. Microsoft (MSFT -0.16%) and Alphabet (GOOG -12.29%) (GOOGL -12.64%) both reported strong cloud growth yesterday, tempered by massive spending, with one key difference: Microsoft still has positive FCF, while Alphabet’s FCF swung to a $9.1 billion outflow from a $24.5 billion inflow a year earlier.
AI cloud demand and Anthropic: why I’m still skeptical
AWS is growing at a remarkable rate, and much of its capacity is already spoken for. So too are Microsoft’s Azure and Alphabet’s Google Cloud businesses. But I’m still skeptical that over time, the math will work out on these investments, and in the meantime, more debt is being introduced to the equation as spending outpaces cash generation.
And beyond this, I think investors need to consider where a lot of that demand is coming from. AI labs like Anthropic are driving a significant part of this growth and are the future demand that these companies are counting on. I’m not sure how reliable Anthropic and its rival OpenAI will be in the years to come given the enormity of their commitments.
If Anthropic’s revenue growth keeps following an exponential path, that might not be a problem, but if that growth cools off — which we are already seeing evidence of — these hyperscalers may have a hard time collecting everything their spending plans are built on.
