Amazon’s AI Revolution Pays Off: AWS Roars Back, Margins Surge, Stock Hits All-Time High

Amazon’s Q3 results delivered a powerful rebuttal to skeptics, igniting a 10% surge in after-hours trading and propelling the stock to a new all-time high. The quarter marked a definitive return to form for the tech giant as its cloud business—long seen as a laggard to Microsoft Azure and Google Cloud—reclaimed momentum with 20% year-over-year AWS growth, precisely matching the market’s “whisper number.” That figure carried symbolic weight: it signaled that Amazon Web Services, the company’s profit engine, is once again holding its own in the AI infrastructure race. Coupled with rising retail margins, strong advertising growth, and leaner operations, Amazon’s Q3 was a showcase of how disciplined cost management and strategic reinvestment in AI are reshaping the company’s bottom line.

The headline numbers were impressive across the board. Net sales rose 13% to $180.2 billion, topping consensus estimates of $177.8 billion, while EPS surged to $1.95, comfortably ahead of the $1.57 expected by Wall Street. Excluding foreign exchange tailwinds, sales climbed 12%, underscoring the organic strength of the business. AWS contributed $33.0 billion in revenue, ahead of estimates and accelerating sharply from last quarter’s 17% growth. That performance eased months of concern that Amazon was losing share to its cloud rivals—a narrative that had weighed on sentiment even as demand for AI infrastructure boomed industrywide.

Operating income came in at $17.4 billion, flat year-over-year but weighed down by two one-time charges: a $2.5 billion FTC legal settlement and $1.8 billion in severance costs tied to planned layoffs. Excluding these items, operating income would have reached $21.7 billion, implying underlying operating margins north of 12%. That represents a remarkable improvement from prior years—up from 11.3% in Q4 2024, 7.8% in 2023, and a meager 2.5% just three years ago. Investors were quick to recognize that much of this margin expansion stems from AI-driven automation and process efficiencies. CEO Andy Jassy’s “Return on AI” thesis—first articulated earlier this year—appears to be taking hold, as the company’s logistics, advertising, and cloud divisions increasingly rely on proprietary AI tools for optimization.

The North American retail business, long a margin drag, continued to show material improvement. Sales rose 11% to $106.3 billion, while operating income—excluding the FTC settlement—would have reached roughly $7.3 billion, up from $5.7 billion a year ago. International sales rose 14% to $40.9 billion, or 10% excluding currency gains, reflecting a rebound in discretionary spending and expanding Prime adoption across key markets such as India and Europe. Advertising, another high-margin growth driver, jumped 24% year over year to $17.7 billion, while subscription services climbed 11% to $12.6 billion, powered by Prime Video and audiobook engagement. Together, these segments continue to diversify Amazon’s revenue mix away from low-margin retail and toward scalable digital services.

In parallel, Amazon’s layoffs of 14,000 employees—part of a broader restructuring initiative—were received positively by investors. While headlines about job cuts often raise concerns about growth deceleration, the company emphasized that the reductions stem from automation and efficiency gains, not financial distress. Reports indicate internal automation could streamline up to 75% of operations over the next few years. Investors appear to view this as a proactive evolution of Amazon’s workforce rather than a retrenchment, particularly given the company’s continued hiring in AI infrastructure and robotics.

On the financial front, Amazon’s net income jumped to $21.2 billion, up from $15.3 billion last year, aided by a $9.5 billion gain from its investment in Anthropic, the AI startup it co-backs with Google. Cash flow from operations increased 16% to $130.7 billion, though free cash flow dipped to $14.8 billion due to a substantial $50.9 billion increase in capital expenditures. That spending spree reflects Amazon’s aggressive AI buildout—particularly in data center infrastructure, with $35.1 billion in Q3 CapEx exceeding forecasts by more than $3 billion. The company disclosed that its Trainium2 chip adoption has become a multibillion-dollar business, growing 150% sequentially and supporting the launch of “Project Rainier,” an AI supercluster housing 500,000 of the custom chips.

For the fourth quarter, Amazon guided for net sales between $206 billion and $213 billion, representing 10–13% year-over-year growth and modestly above consensus at the midpoint. The company expects operating income between $21 billion and $26 billion, exceeding analyst expectations of $23.6 billion. Management highlighted ongoing AI demand and continued retail resilience as key growth levers. With AWS reaccelerating and margins improving, Amazon’s Q4 outlook positions it as the most balanced player among the “Big Three” cloud providers—a stark contrast to Microsoft’s margin compression and Google’s uneven cloud trajectory this earnings season.

What stood out most in the quarter wasn’t just the beat—it was the quality of the beat. AWS’s return to 20% growth defused fears of structural slowdown. Retail’s margin gains proved that efficiency improvements are real, not theoretical. And the company’s free cash flow decline, while notable, was entirely a function of aggressive reinvestment into future capacity—a trade-off shareholders seem happy to accept as Amazon redefines itself around AI infrastructure leadership.

At a structural level, Amazon’s operating margin trajectory tells the story: from 2% pre-pandemic to over 12% today, an inflection that has effectively re-rated the company’s valuation profile. Analysts are likely to revise price targets higher following the report, especially as Q4 guidance implies sustained margin strength into 2026.

In sum, Amazon’s Q3 was more than just a strong quarter—it was a confidence restoration event. With AWS growth reaccelerating, operating leverage accelerating, and the retail engine running leaner than ever, the company appears poised to sustain double-digit revenue growth while expanding margins—a feat few megacaps can match. The after-hours rally reflects not just earnings relief but renewed belief that Amazon is once again playing offense in the AI era.

Bottom Line: Amazon just delivered one of its cleanest quarters in years—top-line growth, AI-fueled margin gains, and a decisive comeback for AWS. Investors wanted proof that Amazon could balance scale with profitability in the new AI cycle. They got it—and then some.