Amazon Is Borrowing Its Way Into the AI Race

Key takeaways

• AWS revenue grew 39.3% to $46 billion, its fastest growth in almost five years, and now drives about 63% of Amazon’s operating profit.
• Amazon’s trailing free cash flow fell to minus $42.4 billion, down from minus $7.6 billion just three months earlier.
• Long-term debt rose from $65.6 billion to $173.1 billion in nine months as capex heads toward $220 billion this year.
• Microsoft spent heavily too but stayed cash positive, adding $18.6 billion in free cash flow over the same quarter.

Amazon has just posted its best cloud quarter in almost five years. AWS revenue jumped 39.3% to $46 billion, helping push the company's operating margin to a record 13.9%, and Andy Jassy, Amazon's president and CEO, told analysts that AWS would grow by more than 40% in both 2027 and 2028.

But investors heard all of that and sold anyway, knocking more than 6% off the stock in after hours trading.

That isn't a contradiction so much as a verdict. For two years, the market treated Amazon's AI spending as a story about the future. On October 29, it started reading it as a story about the balance sheet, because the numbers beneath the AWS headline show a company that's no longer paying for its future out of what it earns today. It's borrowing to build it.

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What Amazon reported in Q3 2026

The headline numbers were good, which is what makes the selloff interesting.

Revenue rose 12% to $201.9 billion, just shy of the roughly $202.1 billion analysts expected, and earnings per share of $1.89 came in a few cents below the $1.96 estimate. Net income dipped to $20.7 billion from $21.2 billion, but that comparison flatters last year, which included a large gain on Amazon's stake in Anthropic. Operating income is the cleaner measure, and it rose 61% to $28.1 billion.

Most of that came from AWS, whose operating income climbed to $17.8 billion from $11.4 billion a year earlier. In other words, a division that brings in less than a quarter of Amazon's revenue now produces about 63% of its operating profit, which explains why Jassy sounded so confident:

"Our AWS investment in functionality and infrastructure is working, with over 39% year-over-year revenue growth in Q3 ($184 billion revenue run rate) and projected revenue growth rates of over 40% both in 2027 and in 2028."

Had the story ended there, the stock would probably have gone up. It didn't, and the reason sits in the cash flow statement.

Why did Amazon stock fall after earnings?

The short answer is that Amazon's growth has become extraordinarily expensive.

In the third quarter alone, Amazon spent about $77.3 billion on capital expenditure, most of it on data centres and the chips, servers and power needed to run them. That puts it on course for roughly $220 billion this year, up from $131 billion in 2025, and Jassy has already warned that 2027 will be "meaningfully more."

Spending on that scale has wiped out Amazon's free cash flow. Over the past 12 months the company recorded an outflow of $42.4 billion, compared with a $14.8 billion inflow a year earlier, a swing of $57.2 billion.

What should worry investors most, though, isn't that the number is negative but how quickly it's getting worse. Three months ago, Amazon's trailing free cash flow stood at minus $7.6 billion, which means the hole got $34.8 billion deeper in a single quarter.

None of this means the underlying business is weak. Operating cash flow actually rose 29% to $168.3 billion over the same 12 months. The problem is that spending on property and equipment, net of sales and incentives, rose even faster, up $94.8 billion in a year, and Amazon says most of that increase went into AI. So the business is producing plenty of cash; the buildout is simply eating all of it and then some.

Amazon's debt has more than doubled in 2026

If one number from Amazon's report deserves a headline, it's this one, and it barely got a mention.

Amazon's long-term debt stood at $65.6 billion at the end of December 2025. By September 30, 2026, it had reached $173.1 billion, meaning the company took on $107.5 billion in new long-term debt in just nine months.

The balance sheet doesn't say what each dollar was raised for, so it would be wrong to claim all of it went into data centres. Still, when free cash flow falls $42 billion into the red and debt rises by $107 billion over the same period, you don't need a forensic accountant to see how the two are connected.

And that connection marks a real shift. Amazon built its reputation on pouring its own cash back into the business, and it is now financing the AI race with borrowed money.

That doesn't make it a crisis, since a company producing $168 billion a year in operating cash can comfortably carry the debt. What it does change is the question investors are asking. It's no longer simply "will AI pay off?" but "will it pay off before the bill comes due?"

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Will Amazon's AI spending pay off?

Jassy, for his part, is convinced the spending will pay off, and he said so with feeling:

"We have even more conviction than we already had that the investment we're making in AWS will yield a much larger revenue and free cash flow-generating business than we would have imagined a couple of years ago, with strong return on invested capital."

Conviction, however, isn't a cash flow statement, and investors can't bank it.