Bernstein: Amazon third-quarter results: AWS growth accelerates as advertising slows and AI spending weighs on cash flow

AWS growth is accelerating. What is management seeing?

In the third quarter of 2026, AWS revenue rose 39% year over year to approximately $46 billion, up from 37% growth in the previous quarter and accelerating for a sixth consecutive quarter; its operating margin was 38.7%, roughly stable quarter over quarter after excluding one-time items.
Management expects AWS revenue to grow more than 40% in both 2027 and 2028, citing visible customer commitments, large reserved-capacity agreements and the early stage of enterprise adoption of AI inference. The backlog of orders to be fulfilled reached $578 billion at quarter-end, up approximately $80 billion from the prior quarter, with enterprise customers also coming from a more diverse range of sources.
Inference already accounts for more than half of AWS AI revenue. Customers running AI applications also need compute, storage, networking, database and security services, so AI demand can also drive revenue from other AWS infrastructure.

AI workloads currently have lower margins than the mature core cloud business; as AI’s share of revenue rises and capital spending shifts toward assets with shorter useful lives, Bernstein expects some pressure on AWS margins. In-house chips and network and software optimization are helping keep current margins stable.
Amazon maintained its expectation of approximately $220 billion in capital spending for 2026, with the vast majority directed toward AWS and AI infrastructure. Free cash flow turned to an outflow of $42.4 billion over the past 12 months, while purchases of property and equipment rose by nearly $95 billion year over year in the same period.
Bernstein believes improvements in retail efficiency can partly offset the pressure from AI investment, but it is also watching returns on capital, overbuilding and customer concentration; the firm expects AWS’s long-term steady-state margin to be closer to 35% than to 25%–30%.

Third-quarter advertising revenue growth slowed to approximately 12% year over year from 26% in the previous quarter. The shift of Prime Day from the third quarter to the second quarter alone reduced advertising growth by approximately 8.5 percentage points; the absence of NBA advertising inventory and a change in the comparison base for search engine marketing adjustments also had an impact. Management expects advertising growth to recover to close to 20% in the fourth quarter.
Worldwide paid units rose 12% year over year, while delivery costs rose 11%; excluding higher fuel and line-haul transportation costs, delivery costs rose approximately 8%. Inventory placement, shorter delivery distances and package consolidation help lower the cost to serve per unit.
The company-wide operating margin reached a record 13.9% in the third quarter; however, margins in the North America and International segments were approximately 8% and 4%, respectively. The expansion of low-price competitors in international markets could gradually affect pricing, seller economics and platform growth.

The company expects fourth-quarter revenue of $240 billion to $247 billion, up 12% to 16% year over year and broadly in line with market expectations; operating income guidance is $28.5 billion to $33.5 billion, with a midpoint approximately 6% below the market consensus before the results were released.
The start of capitalization for some Project Leo production and launch costs was postponed until the first quarter of 2027, so most of the related costs will continue to be expensed in the fourth quarter of 2026.
Bernstein maintains its Outperform rating and $320 per-share price target. The firm believes AWS revenue could continue to grow rapidly and that the retail business is also improving efficiency; its valuation gives equal 50% weights to a sum-of-the-parts valuation and a discounted cash flow method.