What Happened?
Shares of cloud computing and online retail behemoth Amazon (NASDAQ:AMZN) jumped 7.6% in the morning session after the company reported impressive third-quarter earnings. Amazon blew past analysts' EPS and operating income expectations during the quarter, giving credence to the argument that the company can be much more profitable and high margin going forward. Operating profit guidance for next quarter also came in ahead.
Taking a closer look at the operating segments, AWS (Amazon Web Services), grew 19% year on year, in line with analysts' estimates, while operating margin beat handily. Notably, AWS reached a revenue run rate of $110 billion amid growing demand for cloud and AI services.
Advertising revenue, which is a promising growth driver, also exceeded Wall Street's expectations. AMZN noted that the advertising business recorded strong margin expansion, helping to make sense of the improvements in profitability recorded in the quarter.
It wasn't a perfect quarter, as revenue guidance for the next quarter was underwhelming. Given the excitement around margins, though, the market is overlooking the revenue guidance shortfall. Overall, we think this was a very good quarter showing that there might need to be more bullishness around Amazon's long-term margin structure.
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What The Market Is Telling Us
Amazon’s shares are very volatile and have had 27 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 25 days ago when the stock dropped 3.1% on the news that Wells Fargo analyst Ken Gawrelski downgraded the stock's rating from Overweight (Buy) to Equal Weight (Hold) and lowered the price target from $225 to $183. The analyst was concerned that the projected gains from AWS (Amazon Web Services - cloud computing business) would likely not be enough to power the profitability narrative. Gawrelski added, "While the market is more prepared for pressure on 4Q [operating income], we caution that margin expansion could be capped in 1H25 as well."
Amazon is up 32.3% since the beginning of the year, and at $198.43 per share, it is trading close to its 52-week high of $200 from July 2024. Investors who bought $1,000 worth of Amazon’s shares 5 years ago would now be looking at an investment worth $2,215.
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