Bernstein: Amazon third-quarter earnings: AWS sets long-term growth target as advertising slowdown and investment weigh on profit outlook

Why does the AWS long-term target matter?

In the third quarter of 2026, AWS revenue grew 39% year over year, below buy-side growth expectations that had already been lowered; its operating margin edged down quarter over quarter to around 39%, also missing the expected 40% threshold.
In a rare instance of long-term guidance, management said it expects AWS to maintain growth above 40% through 2028. Bernstein believes this means the market needs to raise its long-term expectations, but customer concentration among frontier AI labs and supply-chain exposure remain concerns.

Advertising had the largest shortfall relative to expectations this quarter: year-over-year revenue growth fell from 26% in the second quarter to 11% in the third, and the two-year compound growth rate also slowed.
The shift of Prime Day in major markets to the second quarter, along with a mild foreign-exchange headwind, explains part of the slowdown. Management expects advertising revenue growth to rebound to nearly 20% in the fourth quarter, although the year-over-year comparison base remains challenging.
Bernstein is also watching whether advertising, an important source of profit, is maturing and whether AI-driven changes in how consumers discover products are affecting growth; the impact beyond promotion timing remains a question raised by the firm.

Third-quarter retail revenue grew 12% year over year, slightly below expectations. Management said growth would have been about 4 percentage points higher excluding the effect of the Prime Day timing shift; viewed together, the second and third quarters’ cumulative two-year growth was broadly in line with expectations.
Amazon’s overall operating margin was around 14%; North American and international operating margins remained roughly at 8% and 4%, respectively. Bernstein believes that, although the promotion timing shift slowed advertising growth, further reductions in cost to serve continued to support retail margins.
However, rising material costs, a tightening supply-chain cost environment, higher depreciation and continued investment in AI infrastructure could all put greater pressure on margins.

The company expects fourth-quarter revenue of 240 billion to 247 billion dollars, up 12% to 16% year over year, broadly in line with expectations and including a foreign-exchange headwind of about 0.6 percentage points.
Operating profit guidance is 28.5 billion to 33.5 billion dollars, with the midpoint approximately 6.6% below the market consensus before the earnings release. Bernstein believes this reflects a degree of management conservatism about the pace of investment and spending, and raises the question of how much cloud and advertising growth can translate into profit.
The company still expects capital expenditure of around 220 billion dollars in 2026. Investor attention has shifted to infrastructure construction, capacity expansion and AI demand in 2027, as well as the impact of higher spending on funding sources and capital allocation.
Bernstein maintained its outperform rating and 320-dollar price target.