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Amazon Surpasses Earnings Projections, Emphasizes AI’s Role in Cloud Future

Amazon Exceeds Earnings Estimates and Highlights AI’s Role in the Cloud

Amazon (AMZN) released its third-quarter earnings report on Thursday, surpassing expectations for net sales and EPS, although cloud revenue fell short. In the wake of the earnings call, Amazon’s shares surged by up to 5% in after-hours trading.

AI Takes Center Stage

During the earnings call, CEO Andy Jassy emphasized the pivotal role of artificial intelligence (AI) in Amazon’s cloud business, Amazon Web Services (AWS). Jassy stated that AI presents an opportunity worth “tens of billions” for AWS. This year, AWS introduced the Bedrock AI service, streamlining the development of large language models. Jassy noted, “Our generative AI business is growing very, very quickly.”

In September, Amazon invested $1.25 billion in Open AI competitor Anthropic, with the potential for the investment to reach $4 billion over time. AI is poised to be the growth catalyst AWS needs, as the Q3 results showed a slight shortfall in net sales, coming in at $23.06 billion, compared to Wall Street’s expectation of $23.13 billion.

However, there were positive signs, with AWS sales up 12% year-over-year and the division’s operating income increasing to $7 billion, marking a roughly 29% surge from the previous year. Analyst Brent Thill of Jefferies commented, “That 12% growth is ‘just enough to keep the goblins away.'”

Mixed Cloud Results

This week has witnessed a mixed bag of cloud results. On Tuesday, Microsoft (MSFT) reported better-than-expected growth in its Azure cloud business, while Alphabet’s (GOOG, GOOGL) cloud growth figures disappointed.

AWS’s growth has been closely scrutinized this year, drawing significant investor attention. In a media call on Thursday, Amazon CFO Brian Olsavsky suggested that AWS’s growth hasn’t completely stalled but is navigating a “delicate” transition phase. The company is slowing down its cost-cutting efforts as it seeks to expand its customer base and further monetize its services.

Earnings Overview

Here are the key figures from Amazon’s earnings report compared to analysts’ estimates compiled by Bloomberg:

  • Net sales: $143.08 billion actual, versus $141.56 billion expected
  • AWS net sales: $23.06 billion actual, versus $23.13 billion expected
  • Earnings per share: $0.94 actual, versus $0.58 expected
  • Operating margin: 7.8% actual, versus 5.46% expected
  • Q4 net sales: $160-167 billion actual, versus $166.57 billion expected

Analyst Recommendations

Currently, analyst recommendations for Amazon include 63 Buys, two Holds, and zero Sells.

Looking Ahead

Amazon’s increasing operating margins are worth monitoring, indicating the success of its post-pandemic efficiency efforts. Operating margins rose by 32% between Q1 and Q2, and Q3 delivered a significant beat. Wedbush’s Scott Devitt observed, “Amazon shares have appreciated 84% when operating margins are rising versus just 1% when operating margins are declining,” based on a ten-year historical analysis.

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