Amazon shares moved firmly higher in early Friday trading, adding upward momentum to the three major stock benchmarks, after the tech and retail giant's third quarter earnings triggered a host of price-target changes from top analysts on Wall Street.
Amazon (AMZN) , which along with its megacap tech peers is spending billions on new AI technologies and infrastructure, is also seeing expansion in its retail and advertising businesses heading into the fourth quarter, while its powerful Web Services division continues to impress in an increasingly competitive market.
That's allowing investors to feel more confident that its massive capital-spending plans, which include a $75 billion outlay this year and even more projects in 2025, can be offset at least partly by improving cash flow and profit margins until the AI bets start to monetize.
"We've proven over time that we can drive enough operating income and free cash flow to make this very successful return-on-invested-capital business," CEO Andy Jassy told investors on a conference call late Thursday.
"And we expect the same thing will happen here with generative AI. It is a really unusually large, maybe once-in-a-lifetime type of opportunity," he added. "And I think our customers, the business, and our shareholders will feel good about this long term that we're aggressively pursuing it."
Amazon posted overall third-quarter revenue of $158.9 billion, an 11% increase from the year-earlier period and narrowly ahead of Wall Street forecasts. The figure included a 7% gain in retail sales and a 14% improvement in ad sales.
The group's operating margin widened to 11%, nearly 2 percentage points ahead of the consensus Wall Street forecast, thanks in part to shipping and logistic efficiencies and the group's ongoing cost cuts.
Amazon sees margin improvement
Amazon Web Services revenue rose 19% to $27.5 billion, capping the best quarterly gain in nearly two years, with an operating margin of 38.1%, nearly 5 percentage points ahead of analysts' estimates.
Goldman Sachs analyst Eric Sheridan, who lifted his Amazon price target by $10 to $240 per share following last night's update, said the results gave the investment bank "increased confidence in our medium/long-term thesis around Amazon’s platform drivers (in both revenue compounding and margin trajectory)."
Sheridan said Amazon's e-commerce margins were getting a boost from a more efficient logistics network, while scale in the ad business was also allowing for improved profitability.
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"AWS benefits from a structural growth opportunity, driven by enterprise customers’ evolving needs and [generative-AI-workload] tailwinds," he added.
"Looking long term, we reiterate our view that Amazon will compound a mix of solid consolidated revenue growth and operating margin expansion over multiple years while also investing in key long-term growth initiatives," Sheridan and his team wrote.
Looking into the final months of the year, a key period for its retail and ad operations, Amazon estimated revenue in the region of $185 billion, just shy of the midpoint of the LSEG forecast of around $186.1 billion, with more margin expansion and higher operating income of between $16 billion and $20 billion.
AI-demand trends favor Amazon: analyst
JMP Securities analyst Nicholas Jones, who lifted his price target by $20 to $285 per share following last night's update, called Amazon "the stock to own within e-commerce given its wide selection of non-discretionary items, its large and growing advertising business, and AWS's exposure to AI."
"Amazon is seeing favorable trends in everyday essentials, leading customers to build bigger baskets and shop more frequently, though management noted customers remain cost-conscious," Jones said.
"Demand for AI is continuing to drive strong AWS trends, with AI representing a multibillion-dollar annual revenue run rate and growing in the triple digits."
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The AWS trends, tied to the surge in global AI investment spending, suggest the unit's AI business is a "multibillion-dollar revenue run rate business that continues to grow at a triple-digit year-over-year percentage and is growing more than three times faster at this stage of its evolution as AWS itself grew," Jassy told investors late Thursday.
D.A. Davidson analyst Gil Luria cited this improvement, as well as AWS's gains against hyperscaler peers such as Microsoft Azure (MSFT) and Google Cloud (GOOGL) , as driving a reacceleration for the group.
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Over the past few quarters, Amazon has taken several steps to reach product and feature parity with its hyperscaler peers in AI, and particularly Azure, where Amazon now has a broad set of product offerings for GenAI specific workloads," said Luria.
"Amazon is also seeing strong adoption of their AI features including Amazon Q, Bedrock, and SageMaker, and we expect at the upcoming 're:Invent' conference in December for AWS to unveil innovative products and features to up the competition with the other hyperscalers," he added.
Amazon shares were marked 6.4% higher in early Friday trading to change hands at $198.29, a move would extend the stock's 2024 gain to around 31% and lift its market value to just under $2.1 trillion
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