Amazon free cash flow plunges due to massive AI investments

Amazon's third-quarter free cash flow deficit widened sixfold to $42.4 billion as massive capital expenditures for AI infrastructure caused both revenue and earnings per share to miss market forecasts.

The earnings report from Amazon, a leader in the global e-commerce and cloud markets, is sending shockwaves through the market. Following an "earnings shock" where both revenue and earnings per share (EPS) fell below market forecasts, the company's free cash flow (FCF) has deteriorated sharply due to massive investments in AI infrastructure, fueling doubts about the future sustainability of semiconductor demand.

According to an analysis of Amazon's third-quarter results provided by The Man Who Explains the Economy (Kim Kwang-seok TV), Amazon's revenue rose 12% year-on-year to $201.94 billion. This figure fell short of the $202.31 billion forecast compiled by the London Stock Exchange Group (LSEG) by approximately $370 million. Earnings per share (EPS) was also recorded at $1.89, missing the Wall Street consensus of $1.96. In particular, Professor Kim Kwang-seok analyzed that "the collapse of EPS, which represents value per share, is a signal that improvements in profitability are stagnating." He noted in the video that while the market was pleased when Amazon's quarterly revenue surpassed $200 billion, it is currently hovering at the $201.9 billion level, showing poor performance in both growth and profitability.

AWS performed well, but growing cash burden holds it back

Looking at individual segments, Amazon Web Services (AWS), the cloud business, showed unrivaled growth and performed well on its own. AWS third-quarter revenue surged 39.3% year-on-year to $45.98 billion, exceeding the market forecast of $45.48 billion. This represents the fastest growth rate in the last five years, with an annualized revenue run rate reaching $184 billion. Amazon CEO Andy Jassy offered an optimistic outlook, stating that "investments in AWS are paying off" and predicting that growth will continue at over 40% through 2027–2028. AWS operating profit also surged more than 55% year-on-year to $17.77 billion, accounting for more than 60% of Amazon's total operating profit of $28.08 billion.

In contrast, the advertising and retail segments were sluggish. Advertising revenue reached $19.64 billion, showing a gap of more than $1 billion from the expected $20.82 billion, while retail growth slowed significantly to 6% in North America and 5% overseas, compared to 11% in North America and 14% overseas last year. The core issue is the deterioration of cash flow caused by massive capital expenditure (CapEx). Amazon increased its purchases of property, plant, and equipment by $94.8 billion compared to the previous year to expand data centers and AI equipment. Consequently, Amazon's annual free cash flow (FCF) saw its deficit widen sixfold to $42.4 billion in the third quarter, following a $7.6 billion deficit in the previous quarter. Compared to the same period last year (third quarter of '25), the cash flow shrank rapidly, showing a growth rate of minus 386%. Professor Kim conveyed market concerns, stating, "Free cash flow, which is the money left over after subtracting land acquisition and compensation fees for building data centers, is drying up."

Amazon's cash flow directly linked to semiconductor demand from Samsung Electronics and SK hynix

This poor performance by Amazon is expected to act as a significant variable for Korean semiconductor companies beyond being a problem for a single firm. When Amazon is defined not merely as a shopping mall but as a company providing vast cloud infrastructure, its capital expenditure is directly linked to semiconductor demand. Professor Kim explained, "Amazon is a key customer for our semiconductor companies. Until now, the explosive free cash flow of hyperscalers has led to revenue for semiconductor companies, but now questions are being raised that this flow may break."

In fact, the market is raising the possibility that the rate of capital expenditure increase by big tech companies may slow down starting from 2027. While big tech companies such as Amazon, Alphabet, Microsoft, and Meta have driven the semiconductor industry by injecting massive amounts of cash, if phenomena such as Amazon's free cash flow turning negative or plunging occur, they will have no choice but to adjust the scale of their investments. Professor Kim analyzed, "If the growth rate of capital expenditure breaks, concerns about whether the record-breaking operating profits and revenue growth recorded by Samsung Electronics and SK hynix can be maintained are being reflected in stock prices."

Big tech CapEx war and the inflection point of the semiconductor industry

Currently, the growth of the U.S. economy (3.4% GDP growth in the third quarter of '26) is based on massive investments, with the increase in capital expenditure (CapEx) contributing two-thirds of that growth. At the center of this investment war are Amazon, Alphabet, Microsoft, and Meta. In particular, Amazon accounts for the largest portion of capital expenditure among them, so the deterioration of Amazon's cash flow directly affects the investment sentiment of the entire market. The video mentioned that a common issue of cash flow problems among big tech companies is appearing, such as Alphabet also seeing its free cash flow turn negative from the second quarter.

Ultimately, this earnings shock from Amazon suggests that the "flow of money" for AI infrastructure investment has reached an inflection point. Warnings are emerging that if the situation continues where the cash-generating capabilities of big tech companies cannot keep up with the pace of data center investment, the growth momentum of the semiconductor industry as a whole may weaken. Professor Kim suggested the possibility of a shift to a different leading structure rather than semiconductors, stating, "We must pay attention to the phenomenon of the reversal of money brought about by AI."

Source: original video (YouTube)