Amazon stock jumped Friday after the e-commerce and cloud giant posted better-than-expected third quarter earnings. Revenue for its market-leading Amazon Web Services cloud division came in light. But comentary from CEO Andy Jassy indicated that deal flow had picked up for the key profit driver late in the period.
Shares climbed over 5% in after-hours trading and extended gains Friday morning following the Thursday evening report. Amazon stock rallied to around 125.75, hitting its highest level since April.
For the quarter ending in September, Amazon earned an adjusted 94 cents per share on revenue of $143.1 billion. Analysts predicted earnings of 59 cents on sales of $141.5 billion.
Cloud Momentum Returns After Summer Lull
The third quarter results provided investors some relief after worries grew that AWS growth was set to flatline.
AWS revenue increased 12% year-over-year to $23.1 billion. That was just shy of estimates calling for $23.2 billion. It also represented no sequential improvement after AWS also grew sales 12% in the second quarter.
The performance renewed caution around business software spending amid economic uncertainty. Those worries deepened this week when Google Cloud reported disappointing third quarter growth.
But Jassy said AWS saw “surprising” uptake for its new generative AI tools. He added that the pace of dealmaking accelerated toward the end of the period.
“Companies have moved more slowly in an uncertain economy in 2023 to complete deals. But we’re seeing the pace and volume of closed deals pick up,” Jassy explained. “We’re encouraged by the strong last couple of months in new deals signed.”
The commentary appeared to alleviate concerns that AWS growth was set for an extended lull. It also contrasted with Google, which said customers remained cautious on big cloud commitments.
AWS remains the undisputed market leader in cloud services. But Microsoft has emerged as a clear number two after prioritizing its Azure cloud business.
Generative AI Race Heats Up
Jassy also took aim at rival Microsoft, which has made major generative AI bets. He claimed AWS is seeing “very favorable” growth in its AI business vs. competitors.
“In our best estimation, the amount of growth we’re seeing and the absolute amount of generative AI business we’re seeing compares very favorably with anything else I’ve seen externally,” Jassy boasted.
The AI wars have intensified since the launch of ChatGPT earlier this year. Microsoft is investing billions in OpenAI, the startup behind the viral chatbot. AWS struck its own generative AI deal in September, announcing a pact to invest up to $4 billion in AI firm Anthropic.
“Management commentary regarding AWS was upbeat in our view and suggested a strong customer pipeline ahead in addition to $10B+ of potential AWS revenue stemming from AI over the next several years,” wrote Wedbush analyst Daniel Ives.
Ad Business Still Shines
Beyond the cloud, Amazon’s online ad segment remains a standout. Advertising revenue jumped 26% year-over-year to $12.1 billion vs. estimates for $11.6 billion.
The robust growth highlights the ongoing shift of ad dollars to Amazon and other digital platforms. Google parent Alphabet similarly posted ad revenue gains despite the choppy economic backdrop.
Meanwhile, overall e-commerce at Amazon increased a modest 7% to $57.3 billion. That edged out projections calling for $56.97 billion.
Amazon’s third-party merchant services segment delivered sales of $34.3 billion. That topped forecasts of $33.4 billion and marked acceleration from 6% growth last quarter.
The company sees revenue coming in between $160 billion and $167 billion in the critical holiday-quarter. Analysts were modeling $167.1 billion heading into the print.
Stock Rally Resumes After Rare Losing Year
The after-hours surge added to the ongoing comeback for Amazon stock. Shares remain up 42% for 2022 after getting decimated last year amid the growth stock sell-off.
Last year marked a rare money-losing period for Amazon, which saw its first annual decline since 2014. Delayed Prime shipping, inflationary pressure and extra costs tied to its massive workforce all weighed on profitability.
But the stock has bounced back in 2022 as investors returned to beaten-down tech names. Amazon reclaimed its $1 trillion market cap earlier this month. Its Relative Strength Rating recently improved to 88 out of a best-possible 99, according to IBD Stock Checkup.
Amazon stock also holds a near-perfect Composite Rating of 83 out of 99. The leading growth stocks often sport a Composite Rating of 90 or higher, IBD research shows.
With Amazon appearing to stabilize key businesses, the stock seems to be regaining its footing after last year’s tumble. The third quarter numbers eased worries about plateauing growth for AWS. It also showed the company’s ad division still humming along at a 20%+ clip.
If Amazon can sustain momentum heading into the vital holiday season, shares seem poised to continue recovering lost ground in 2023. But with economic uncertainty lingering, the tech giant still faces challenges to reboot earnings growth after rare declines this year.