Amazon AMZN) stock is under pressure following the e-commerce and cloud computing giant's third-quarter earnings release on Thursday evening, which fell short of Wall Street's top-and bottom-line expectations.
Like Alphabet GOOGL), Amazon disappointed investors as concerns about massive artificial intelligence spending overshadowed otherwise encouraging growth. However, AMZN's post-earnings selloff has been less severe than Alphabet's, with Amazon shares falling roughly 7% in Friday's premarket trading.
Still, Amazon's accelerating AWS growth, expanding AI opportunities, and improving operating profitability raise the question of whether the pullback presents a buying opportunity.
Amazon's Q3 Results: Earnings Miss, but Record Margins
Amazon reported Q3 earnings of $1.89 per share, missing the Zacks Consensus Estimate of $2.01 and declining from EPS of $1.95 in the year-ago quarter.
Revenue climbed 12% year over year to $201.94 billion but narrowly missed expectations of $202.11 billion.
Encouragingly, operating income surged 61% to $28.1 billion, with Amazon achieving a record operating margin of 13.9%, highlighting improving profitability across its businesses despite substantial AI investments.
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AWS Growth Accelerates as AI Spending Surges
Amazon Web Services (AWS) remained a standout performer, with Q3 revenue soaring 39% YoY to $46 billion, marking its fastest growth in nearly five years. AWS operating income also jumped 55% to $17.8 billion.
Growth is being fueled by surging demand for AI infrastructure and cloud computing, including Amazon's custom Trainium AI chips and Bedrock generative AI platform. New AWS agreements with major technology companies, including OpenAI, Meta Platforms META), and Nvidia NVDA), further highlight Amazon's expanding AI ecosystem.
CEO Andy Jassy projected AWS revenue growth exceeding 40% in both 2027 and 2028, reinforcing confidence in Amazon's long-term cloud and AI opportunities.
However, Amazon reaffirmed its massive $220 billion capital expenditure outlook for 2026, primarily reflecting AI infrastructure investments. The spending has pressured free cash flow, with Amazon joining Alphabet in posting negative free cash flow in Q3.
Amazon's quarterly free cash flow was negative $33.5 billion, bringing its trailing 12-month cash outflow to $42.4 billion, compared with positive free cash flow of $14.8 billion over the prior 12-month period.
Amazon's Q4 Guidance: Holiday Growth Ahead
Looking ahead, Amazon expects Q4 revenue of $240-$247 billion, representing 12%-16% YoY growth as the holiday shopping season approaches and coming in range of Wall Street’s forecast of $245.65 billion (Current Qtr below).
Management also projected Q4 operating income of $28.5-$33.5 billion, up from $25 billion a year ago, while anticipating high-teens advertising revenue growth. The outlook suggests continued retail momentum and improving profitability, although heavy AI spending remains a concern.
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Monitoring Amazon's Valuation
What may be most intriguing to a potential buy-the-dip scenario is that at under $250 a share, AMZN is trading near its lowest forward earnings multiple on record.
At 24X forward earnings, Amazon stock trades at a relatively modest premium to the benchmark S&P 500’s 19X multiple while offering a 60% discount to its historical median of more than 60X.
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Bottom Line: Buy, Sell, or Hold AMZN?
For now, Amazon stock lands a Zacks Rank #3 (Hold), suggesting investors may want to maintain their positions rather than aggressively buy the post-earnings dip.
That said, with AWS growth accelerating and Amazon's retail business entering the critical holiday shopping season, it may be tempting to consider buying shares of the e-commerce giant on a further pullback.
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This article originally published on Zacks Investment Research (zacks.com).