Amazon beats revenue estimates and touts AI as the future of the cloud

Amazon ( AMZN ) reported third-quarter earnings on Thursday that beat expectations on net sales and EPS, but missed on cloud revenue.

The company’s shares rose as much as 5 percent in after-hours trading, as earnings declined, then rebounded after the company reported earnings.

Artificial intelligence was the star of this call. AI represents an opportunity worth “tens of billions” for Amazon’s cloud business, Amazon Web Services (AWS), CEO Andy Jassey told analysts. This year, AWS launched its Bedrock AI service, which simplifies the development of large language models.

“Our artificial intelligence business is growing very, very quickly,” Jassi said.

In September, Amazon invested $1.25 billion in Open AI competitor Anthropic. The investment may reach $4 billion over time.

AI can provide the growth spurt that AWS is looking for. In the third quarter, the segment slightly missed analysts’ net sales expectations of $23.06 billion, versus Wall Street’s expectation of $23.13 billion.

There were silver linings, however, as AWS sales were up 12% year-over-year and the division’s operating income is also on the rise, reaching $7 billion, a nearly 29% year-over-year increase. The 12 percent gain was “just enough to keep the goblins at bay,” Jefferies analyst Brent Thiel wrote Thursday after earnings.

It’s been a week since the cloudy composite results. On Tuesday, Microsoft ( MSFT ) reported better-than-expected growth in its Azure cloud business, while Alphabet’s ( GOOG , GOOGL ) cloud growth numbers were disappointing.

AWS’s growth has been under the microscope this year, and that’s the issue that has “received the most airtime with investors,” JPMorgan’s Doug Anmuth wrote ahead of earnings. On Thursday, Amazon CFO Brian Olsavsky said in a media call that he doesn’t believe AWS’s growth has completely stalled, instead describing the cloud business as undergoing a “gentle” transition.

The company is slowing its cost-cutting moves as it looks to serve more customers and increasingly monetize its services.

Summary of income

Here are the key numbers Amazon reported, compared to analyst estimates compiled by Bloomberg:

net sales: Actual $143.08 billion, vs. $141.56 billion expected

AWS Net Sales: Actual $23.06 billion, vs. $23.13 billion expected

Earnings per share: Actual $0.94, vs $0.58 expected

Operating margin: Actual 7.8%, vs. 5.46% expected

Q4 net sales: Actual $160-167 billion, vs. $166.57 billion expected

Currently, analysts’ recommendations for Amazon are 63 buys, two holds and zero sells.

Looking ahead, keep an eye on those operating margins. Amazon’s operating margins increased 32% between the first and second quarters, and reached a significant level in the third quarter, suggesting that Amazon’s post-pandemic productivity efforts have been effective.

“We analyzed ten years of historical data and identified all periods where Amazon’s operating margin increased or decreased based on two or more consecutive quarters,” Wedbush’s Scott DeWitt wrote ahead of earnings. We then compared stock price returns over those periods and found that, on average, Amazon stock rose 84% when operating margins increased, compared to just 1% when operating margins decreased.

Allie Garfinkel is a senior technology reporter at Yahoo Finance. Follow him on X, formerly Twitter @agarfinks And in LinkedIn.

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