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 final three months of the year, 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 at least partly offset by improving cash from 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,” Amazon 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 CEO Andy Jassy called generative AI a “once-in-a-lifetime type of opportunity” for the tech and retail giant.
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Amazon posted overall third quarter revenues of $158.9 billion, an 11% increase from the same period last year that narrowly topped Street forecasts and included 7% gain in retail sales and an a 14% improvement in ad sales.
The group’s operating margin improved 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.
Margin improvement
Amazon Web Services (AWS), meanwhile, saw revenues rise 19% to $27.5 billion, capping the best quarterly gain in nearly two years, with an operating margin of 38.1%, nearly 5 percent points head 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 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 Gen 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 said it sees revenues in the region of $185 billion, just shy of the mid-point 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
JMP Securities analyst Nicholas Jones, who lifted his price target by $20 to $285 per share following last night’s update, calling it “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 multi-billion-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’ 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 6.5% higher in premarket trading to indicate an opening bell price of $198.29 each, a move that would extend the stock’s 2024 gain to around 30.2% and lift its market value past $2 trillion.
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