Amazon (AMZN) reported its third quarter earnings on Thursday, beating expectations on net sales and EPS, but missing on its cloud revenue.
Its shares climbed by as much as 5% in after-hours trading, with gains dissipating then shooting back up after the company’s earnings call.
Artificial intelligence was the star of the call. CEO Andy Jassy told analysts that AI represents an opportunity worth “tens of billions” for Amazon’s cloud business, Amazon Web Services (AWS). This year, AWS launched its Bedrock AI service, which streamlines the development of large language models.
“Our generative AI business is growing very, very quickly,” said Jassy.
In September, Amazon invested $1.25 billion in Open AI competitor Anthropic. The investment could go up to $4 billion over time.
AI could provide the growth spurt that AWS is looking for. In Q3, the division fell slightly short of analysts’ net sales expectations, coming in at $23.06 billion, against the $23.13 billion Wall Street expected.
However, there were silver linings, as AWS sales were up 12% year-over-year and the division’s operating income is also on the upswing, coming in at $7 billion, a roughly 29% increase from last year. That 12% growth is “just enough to keep the goblins away,” Jefferies analyst Brent Thill wrote on Thursday after earnings.
It’s been a week of mixed cloud results. On Tuesday, Microsoft (MSFT) reported better-than-anticipated growth in its Azure cloud business, while Alphabet’s (GOOG, GOOGL) cloud growth numbers disappointed.
AWS growth has been under a microscope this year, and it’s a subject that has been “getting the most airtime with investors,” JPMorgan’s Doug Anmuth wrote before earnings. In a call with media on Thursday, Amazon CFO Brian Olsavsky said that he doesn’t believe AWS growth has stalled completely, instead characterizing the cloud business as in a “delicate” transition.
The company’s slowing down its cost cutting moves, as it looks to serve more customers and increasingly monetize its services.
The earnings rundown
Here are the key numbers that Amazon reported, as 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
Currently, analyst recommendations for Amazon come out to 63 Buys, two Holds, and zero Sells.
Looking ahead, keep an eye on those operating margins. Amazon’s operating margins have been increasing — going up 32% between Q1 and Q2, and clocking a notable beat in Q3 — which suggests that Amazon’s post-pandemic efficiency efforts have been working.
“We analyzed ten years of historical data and identified all periods when Amazon’s operating margin either increased or decreased on a basis for two or more consecutive quarters,” wrote Wedbush’s Scott Devitt before earnings. “We then compared share price returns during those periods, and found that on average, Amazon shares have appreciated 84% when operating margins are rising versus just 1% when operating margins are declining.”