Key Points
AWS grew 39%, its fastest pace in nearly five years, and earned about 63% of Amazon's operating profit.
Part of the profit jump came from a $2.9 billion cost in last year's quarter that didn't repeat.
Long-term debt has jumped to $173 billion, and spending on AI pushed free cash flow over the past 12 months to an outflow of $42.4 billion.
Amazon (NASDAQ: AMZN) grew its cloud unit 39% in the third quarter, its fastest pace in nearly five years, and posted its highest operating margin ever. Shares fell about 6% in early after-hours trading. The cloud boom is real, but Amazon is now borrowing heavily to build it, and its free cash flow has swung deep into the red.
Key numbers
Net sales: $201.9 billion, up 12% from a year ago.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
AWS sales: $46.0 billion, up 39%.
Operating income: $28.1 billion, up from $17.4 billion.
Free cash flow over the past 12 months: an outflow of $42.4 billion, compared with an inflow of $14.8 billion a year earlier.
What it means
AWS now does most of the work, earning about 63% of the company's operating profit. Data centers carry heavy fixed costs, so once they fill up, each new dollar of sales falls mostly to profit.
The profit jump is softer than it looks. Last year's quarter carried $2.9 billion of other operating costs that mostly went away this year. Strip them out, and profit still grew far faster than sales. Guidance also calls for higher operating income in the fourth quarter than a year ago.
Image source: Getty Images.
The building bill is coming due. Long-term debt has nearly tripled since December to about $173 billion, and quarterly interest expense more than tripled to $1.7 billion. Amazon kept its plan to spend about $220 billion on capital projects this year, and those new facilities will add depreciation for years.
What to watch next
Watch whether the AWS margin holds near 39% as new data centers start to depreciate. Also watch whether ad growth picks up from 12% this quarter to the high teens that Amazon expects for the fourth quarter.
Savannah Maxwell has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.