Amazon shares sink 7% as AI spending fuels cash-burn concerns, overshadow cloud growth

Amazon shares fell sharply in after-hours trading on Thursday (local time) as heavy artificial intelligence investments and a weaker-than-expected earnings performance overshadowed accelerating growth in its cloud computing business.The e-commerce and technology giant’s shares dropped as much as 7% after it reported third-quarter results that missed Wall Street expectations and issued a cautious revenue outlook for the crucial holiday shopping quarter. The stock had already fallen 4.3% during regular trading to close at $243.79.Amazon’s cloud computing unit, Amazon Web Services (AWS), delivered a standout performance, with revenue rising 39% year-on-year to $46 billion in the quarter ended September 30. This marked its fastest growth in nearly five years and accelerated from the 37% increase recorded in the previous quarter. Revenue also exceeded analysts’ expectations of $45.61 billion, according to LSEG data.However, investors remained concerned about the cost of expanding the business to capitalise on growing demand for artificial intelligence. Amazon has forecast capital expenditure of $220 billion for 2026, largely to build AI data centres and expand its technology infrastructure.Chief executive Andy Jassy told analysts that capital expenditure would be “meaningfully more” next year, without providing a specific figure. “Our strategy is working and I expect it will for the foreseeable future,” Jassy said, defending the company’s investment plans.He also said AWS could become a business generating more than $1 trillion in annual revenue within five to 10 years, adding that demand for the unit’s services remained strong.“Customers are gobbling it up,” Jassy said, referring to the rapid adoption of Amazon’s AI infrastructure.Cash burn and outlook weigh on sentimentAmazon’s spending plans have raised questions about how quickly its AI investments will translate into stronger cash generation. The company reported a trailing 12-month cash burn of $42.4 billion in the September quarter, driven by heavy capital expenditure. Spending on capital projects during the quarter reached $77.26 billion, around $20 billion above estimates compiled by LSEG.“The free cash flow looks like the ugly part of the report,” said Dave Wagner, portfolio manager at Aptus Capital Advisors. “Operations generated plenty of cash but their capex just absolutely swallowed it.”Amazon reported net sales of $201.94 billion for the quarter, up 12% from $180.17 billion a year earlier. Net income declined to $20.69 billion, or $1.89 per share, from $21.19 billion, or $1.95 per share, in the year-ago period. Analysts had expected earnings of $1.97 per share on revenue of $202.2 billion, according to FactSet.The company forecast fourth-quarter net sales of between $240 billion and $247 billion, representing growth of 12% to 16% from a year earlier. The midpoint of the range, $243.5 billion, was slightly below analysts’ estimate of $244.51 billion, according to LSEG.The outlook covers the holiday shopping season, a crucial period for Amazon’s retail business, as consumers contend with elevated living costs and higher fuel prices.Advertising business misses expectationsAmazon’s advertising division also disappointed investors. Revenue rose 12 per cent to $19.6 billion, falling short of analysts’ expectations for growth of 18%. It was the first time in seven quarters that the business missed estimates, according to Reuters.The slowdown contrasted with growth of 26% in the previous quarter and 22% in the year-ago period. Jassy attributed some of the weakness to the timing of the company’s Prime Day shopping event, which took place in the second quarter this year in most major markets, including the US.Amazon said the shift in Prime Day’s timing also affected its overall third-quarter sales growth. Excluding the calendar change, year-on-year revenue growth would have been approximately four percentage points higher, the company said.AI spending pressures spread across Big TechAmazon’s results come amid growing investor scrutiny of the enormous sums technology companies are committing to AI infrastructure and whether the spending will deliver adequate returns.Alphabet, the parent company of Google and YouTube, saw its shares plunge 12% on Thursday after investors reacted to its latest results and rising expenditure on property and equipment. Microsoft, meanwhile, lowered its capital expenditure outlook to $170 billion from $175 billion.The sell-off reflects concerns that the race to build data centres and deploy AI chips could strain cash flows even at some of the industry’s largest companies.Amazon is also facing scrutiny over the impact of its expanding data centre footprint on local communities. Earlier this month, the company said it would invest more than $1 billion over five years in communities where it operates data centres, including funding for education, job training, water conservation and energy-related initiatives.Despite the concerns, Amazon continues to expand its retail operations through faster deliveries, automation and AI-powered warehouse technology. Jassy has argued that these investments are strengthening the company’s competitive position, while the latest AWS results indicate that demand for its cloud infrastructure remains robust.You use AI every day. Now get your AI Quotient. Take the AIQ test.