Amazon faces scrutiny over AI spending and job cuts ahead of Q3 earnings

The Q3 Earnings Outlook

Amazon is scheduled to release its third-quarter earnings results after the market closes this Thursday. Investors are closely monitoring the company's financial health as it navigates a period of intense technological transition. According to LSEG, the company is expected to report revenue of $202.31 billion and adjusted earnings per share of $1.96.

A major focus for the report will be the performance of Amazon Web Services, the company's cloud computing division. StreetAccount predicts that AWS sales will grow by 38% this quarter, which would be its fifth straight quarter of revenue acceleration. This growth suggests that enterprise demand for cloud infrastructure remains strong despite broader economic fluctuations.

The company is also looking to highlight its advertising business, which is projected to reach $20.82 billion. These figures will provide a snapshot of how Amazon is balancing its traditional retail and advertising roots with its growing role as a primary provider of cloud and AI infrastructure.

The High Cost of AI

While revenue growth is a positive sign, the cost of building AI capabilities is creating significant pressure on Amazon's finances. The company recently increased its capital expenditure forecast for 2026 to $220 billion, up from a previous estimate of $200 billion. Analysts surveyed by StreetAccount now expect these expenditures to climb even higher, potentially exceeding $280 billion in 2027.

This aggressive spending is necessary to build the data centers required to meet the massive demand for AI computing power. However, this investment has notably impacted the company's cash flow. In July, Amazon reported a negative free cash flow of $7.6 billion for the trailing twelve months, a sharp drop from the $18.2 billion positive cash flow reported one year earlier.

FactSet estimates suggest the company will remain cash flow negative for the current quarter with an outflow of $9.9 billion. This trend mirrors what other major technology firms, such as Alphabet and Meta, have experienced as they also pour money into AI. Microsoft remains a notable outlier in this group, as its cash flow stayed positive despite a 27% decline in the first quarter.

Workforce Reductions

To offset the costs of its AI pivot and improve operational efficiency, Amazon has been steadily reducing its headcount. Since 2022, the company has laid off more than 57,000 employees, which accounts for roughly 16% of its total corporate workforce. These cuts have occurred in rolling rounds throughout the current year rather than in a single event.

Most recently, Amazon cut several positions within its device software and services team. A company spokesperson told CNBC that these moves were intended to help the company operate more efficiently and align better with its product roadmap. The latest round involved fewer than 250 employees, but it continues the trend of trimming the organization.

These layoffs reflect a broader corporate strategy to prioritize high-growth areas like cloud computing and AI. By reducing the size of its corporate staff, Amazon aims to streamline its operations while simultaneously spending billions on physical infrastructure. This creates a paradox where the company is shrinking its human workforce while expanding its physical and digital computing footprint.

The Battle for Shopping

Amazon is also taking a firm stance on how AI agents interact with its marketplace. The company recently blocked Meta's Muse AI agent from shopping on its platform because it was not given advance notice. This move follows a pattern of blocking dozens of external agents, including Perplexity, which Amazon sued last year over allegations regarding hidden shopping bots.

While it restricts outside bots, Amazon is doubling down on its own internal tools. In May, the company rebranded its Rufus AI chatbot to Alexa for Shopping. Amazon reported that over 400 million shoppers have used the assistant, with the number of users engaging with its agentic features growing more than eight times since the start of the year.

The tool now offers over 100 capabilities, such as managing subscriptions and building gift lists. This internal focus is a strategic move to protect its advertising revenue. If users rely on third-party agents like ChatGPT to find and buy products, they may bypass the sponsored ads that currently fuel Amazon's business model.

Future Market Dynamics

The competition between Amazon and other tech giants over AI shopping tools is intensifying. Analysts from Deutsche Bank noted that Amazon is well-positioned to develop its own agentic shopping offerings because of its proprietary purchase data and commerce infrastructure. The company's goal is to create a seamless experience where the AI understands the user's needs while maintaining Amazon's profit margins.

The primary challenge for Amazon will be finding a balance between open access and monetization. While the company currently blocks many third-party agents, it may eventually need to allow them under specific terms. The key question for the company is how to accommodate these tools without losing the ability to sell advertisements to the people using them.

As the technology matures, the way consumers discover and purchase products will continue to shift toward AI-mediated interactions. Amazon's ability to successfully integrate these features into its existing ecosystem will determine its dominance in the next era of e-commerce. Investors will be watching the upcoming earnings report closely to see if the current spending is yielding the expected momentum.