Why is Amazon's Cash Flow Decreasing Despite AWS's Growing Profits?

Amazon has released a somewhat perplexing financial report.

On October 29, U.S. time, Amazon announced its third-quarter performance. The growth rate of its cloud business, AWS, reached a new high in nearly five years, and the company's overall operating profit margin also hit a record level. However, after the earnings report was released, Amazon's stock price fell by about 7% in after-hours trading. According to the Associated Press, the market is concerned about the performance of the retail business and the company's massive investments in artificial intelligence.

On one hand, there is the rapidly growing cloud business, and on the other hand, there are increasing cash expenditures. Breaking down the financial report, Amazon is using a highly profitable business to support a similarly astonishing scale of infrastructure construction.

How Does Amazon Make Money?

Most of Amazon's revenue still comes from its familiar shopping business. Combined, its North American and international operations account for a significant portion of the group's revenue. However, when revenue is converted to operating profit, the picture changes.

Revenue and Operating Profit Contribution of AWS

According to Amazon's third-quarter financial report, AWS's revenue accounted for about 23% of the group's total, but it contributed approximately 63% of the operating profit. In other words, for every $100 of operating profit Amazon earns, about $63 comes from the cloud business. This proportion is calculated based on the segment data disclosed by the company.

This reflects the different cost structures of the businesses. E-commerce requires purchasing goods, building warehouses, and delivering packages, along with personnel and logistics expenses. The cloud business also requires significant infrastructure, but in the quarterly report, it shows a noticeably higher proportion of operating profit.

This does not mean that the retail business has not improved. The report shows that the operating profit of the North American segment has increased year-on-year, and the international segment remains profitable. However, when readers see that Amazon's overall profit has reached a new high, the most significant contributor is already AWS.

Operating profit and net profit also need to be viewed separately. Amazon's operating profit increased this quarter, but net profit slightly declined. The company explained that the previous year's same period included pre-tax gains from investments in the AI company Anthropic, which inflated the net profit base at that time. Judging the changes in net profit year-on-year to directly assess whether the core business has worsened would overlook this aspect.

Why Should Cloud Business Be Viewed Separately?

AWS has already grown significantly but continues to accelerate. According to the company's quarterly reports, from the fourth quarter of last year to the third quarter of this year, its year-on-year revenue growth rate has risen for three consecutive quarters.

Year-on-Year Revenue Growth Rate of AWS

In the latest quarter, AWS revenue reached $46 billion, a year-on-year increase of 39.3%. Amazon multiplies the quarterly revenue by four, claiming that its annualized revenue run rate reaches $184 billion. This figure is merely a conversion based on the current quarter's speed and does not represent confirmed revenue for the coming year.

The larger the scale, maintaining high growth rates typically requires more new revenue. Compared to the same quarter last year, AWS's revenue increase this quarter was about $13 billion, equivalent to nearly 40% of last year's cloud business revenue for the same period. This is also why the market looks at the cloud business separately: it is not only a profit center but is also increasing revenue for the group.

Amazon CEO Andy Jassy linked growth to AWS's capabilities and infrastructure investments in the earnings report. However, the report did not disclose how much AI contributes to AWS revenue, so the entire cloud business increment cannot be attributed solely to AI.

Where Is the Money Going?

A greater contrast appears in the cash flow statement. Amazon's operating cash flow continues to grow, but after deducting net property and equipment purchases from operating cash flow, the remaining free cash flow has fallen below zero.

Operating Cash Flow vs. Free Cash Flow

The gap between these two lines can be understood as Amazon's net expenditure on property and equipment purchases under this cash flow metric. Over the most recent rolling twelve-month period, this expenditure exceeded the cash generated from operating activities during the same period. Negative free cash flow does not equate to the company incurring operating losses for the quarter, nor does it mean the company has run out of cash on hand.

According to the report, the free cash flow outflow over the past twelve months was about $42.4 billion, while the same period last year still saw inflows. Amazon stated that the change mainly comes from the year-on-year increase in net property and equipment purchases, primarily reflecting AI investments.

There is an easily confused time metric here: each point in the graph covers the twelve months ending at that quarter's end, rather than cash flows occurring solely in that quarter. There is significant overlap of months between adjacent data points, and they cannot be summed.

The profit and cash flow statements also record expenditures differently. The purchase of assets like servers affects cash flow, while related costs typically enter the profit statement in installments through depreciation and other means. Therefore, it is possible for cash flow to be under pressure while still having high operating profits for the quarter. The report discloses investment and cash flow at the group level, and one cannot directly attribute all expenditures to AWS or AI.

Amazon still expects its total cash capital expenditures for 2026 to be about $220 billion. This is the company's full-year expectation provided at the time of the earnings report, and the final expenditure will still depend on actual results.

Is Retail Growth Slowing Down?

When looking at group revenue, one must first check the calendar. This year, Amazon moved most of its major market Prime Day promotions to the second quarter, while last year's events were all in the third quarter.

This means that in the year-on-year comparison for the third quarter, this year lacks some promotional revenue, while the same period last year included the full event. The company reported a year-on-year revenue growth of 12%, estimating that if the timing changes are excluded, the growth rate would be about 4 percentage points higher.

This adjustment is Amazon's own estimate, not another actual reported revenue. It serves to remind readers not to mechanically compare the two quarters and does not alone prove the real growth rate of retail demand. Exchange rates, product mix, and other factors will still affect the results.

Both lines in this financial report hold true: AWS is growing faster, and Amazon is also paying more cash for building future infrastructure.