We’re jacking up our price target on Amazon after its cloud unit shocks the haters
Amazon shares surged Thursday in extended trading after the tech giant posted better-than-expected third-quarter results, driven by accelerated revenue growth from its cloud computing unit. The company’s outlook for the fourth quarter was also solid, easing investor fears that it was falling behind in the AI race. Revenue increased 13% year over year to $180.17 billion, beating expectations for $177.75 billion, according to estimates compiled by LSEG. Earnings per share based on generally accepted accounting principles (GAAP) increased to $1.95, compared with $1.43 last year and the $1.57 estimate, per LSEG. Operating income remained flat year over year at $17.42 billion, missing the $19.7 billion consensus forecast. However, the quarter was negatively impacted by special charges that had a combined impact of $4.8 billion. Without those charges, operating income would have been $21.7 billion. Amazon Why we own it : Amazon may be widely known for online shopping, but its cloud business is the real breadwinner. Advertising is another fast-growing business with high margins. Investment in robust e-commerce logistics infrastructure makes its online storefront the place to be as management works to aggressively decrease delivery times and reduce overall costs. Prime leverages free shipping and video streaming, along with numerous other perks, to keep users paying every month. Competitors : Walmart , Target , Microsoft , and Alphabet Most recent buy : Aug. 23, 2023 Initiated : February 2018 Bottom line Well, well, well: The long knives have been out for Amazon since last quarter after Amazon Web Services (AWS) didn’t experience the same type of AI growth renaissance as its closest competitors, Microsoft Azure and Google Cloud. The talk since then has been that Amazon is underinvested in capacity and is losing market share. With this quarter, the company went a long way in putting that talk to rest. Although AWS may not be growing as fast on a percentage basis as Azure or Google Cloud, keep in mind that AWS is coming off a significantly larger dollar base. “AWS is growing at a pace we haven’t seen since 2022, re-accelerating to 20.2% YoY,” CEO Andy Jassy said in the earnings press release. “We continue to see strong demand in AI and core infrastructure, and we’ve been focused on accelerating capacity — adding more than 3.8 gigawatts (GW) in the past 12 months.” The company claims this represents more power added than any other cloud provider, and management has no plans to let up. “You’re going to see us continue to be very aggressive in investing in capacity because we see the demand. As fast as we’re adding capacity right now, we’re monetizing it,” Jassy added on the earnings call. The company is planning to bring another GW of capacity online in the fourth quarter and expects to double its overall capacity again by the end of 2027. Outside of AWS, we always like to point to the drivers of our long-term thesis on Amazon. What we want to see is operating margins in both North America and international continue trending higher. Much of this is driven by Amazon’s ability to reduce the cost of serving its online shoppers by unlocking efficiencies in its fulfillment and transportation networks. Additional growth from high-margin revenue streams, such as advertising, is also a plus. As we’ve said before, if margins are going higher, the stock price should follow. You have to back out some special charge to see the margin expansion this quarter — but it’s there. As a result of the accelerating AWS story and continued solid margin performance, Amazon shares are ripping about 13% higher in after-hours trading to about $252. If the gains hold, that would be a new all-time high and would make up for what has been an otherwise disappointing year for shareholders. We’re reiterating our 1 rating and increasing our price target to $275 from $250 after this better-than-expected quarter. AMZN 1Y mountain Amazon 1-Year Return Commentary Revenue at cloud unit Amazon Web Services (AWS) increased 20.2% year over year to $33 billion. That growth rate is an acceleration from 17.5% in the second quarter. It’s also much better than the 18% forecast by the Street. Despite heavy investment, AWS’s operating income and operating margin were better than expected, too. Although its margin declined from 38% last year to roughly 34.6%, it was a little better than the 33.9% consensus forecast. AWS finished the quarter with a backlog of $200 billion. That’s up about $5 billion from the second quarter, but Jassy teased on the earnings call that the figure doesn’t include several unannounced new deals in October, which together are more than its total deal volume for the entire third quarter. It’s worth noting that AWS opened up its $11 billion AI data center, called Project Rainer , on Wednesday. The project was built to support Anthropic’s AI model, Claude. The data center cluster contains nearly 500,000 of Amazon’s in-house Trainium 2 chips, with plans to increase to one million by the end of the year. It was mostly revenue beats across the board for the rest of the company’s business segments. There were solid revenue beats in online stores , third-party seller services , and advertising services . Only physical stores and other stores missed, and each by less than $10 million in revenue. By geography, North America sales increased 11% and beat estimates by more than $1 billion. The reported operating margin of 4.51% missed estimates of about 7.11% and contracted from 5.9% last year. However, the margin would have been roughly 6.9% if the $2.5 billion in special charges were backed out. Also, it would have been even higher without the severance charge. The important thing is that underlying margins improved over last year. In the international segment, Amazon’s revenue increased 14% and beat estimates by about $250 million. Operating margins in the region contracted about 69 basis points from last year to 2.93%, missing estimates of 3.52%. However, operating income was negatively impacted by several estimated costs. With those costs taken out, we should see margin improvement in the quarters ahead. On the capital expenditure (capex) side, Amazon invested approximately $34.2 billion in the third quarter, exceeding the consensus estimate of $31.8 billion. Capex was mostly driven by investments to support demand for AI and core services at AWS. The company now expects full-year capex to be approximately $125 billion, which is $8 billion more than what was guided to last quarter. Additionally, Amazon expects to invest more in capex next year compared to 2025. The current 2026 consensus capex estimate on FactSet is $127.5 billion, but this number is likely to be revised higher tomorrow. With earnings from the major cloud computing “hyperscalers” now complete, once again we saw all the major players spend more than anticipated and signal plans to invest more aggressively in the quarters and year ahead. Guidance Amazon’s 2025 fourth-quarter guidance also added a sigh of relief. The company expects net sales to increase 10% to 13% year over year to $206 billion to $213 billion. That midpoint of $209.5 billion beats the consensus of $208.4 billion. Fourth-quarter operating income is expected to be between $21 billion and $26 billion. This midpoint of $23.5 billion is about in line with the consensus of $23.775 billion. Guidance matters, but we always caution against reading too much into Amazon’s forecast, given management’s history of underpromising and overdelivering. Case in point: The company just reported another quarter in which both reported sales and operating income were above the high end of management’s outlook. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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