We’re jacking up our price target on Amazon after its cloud unit surprises
Amazon shares rose in extended trading Thursday after the tech giant reported better-than-expected third-quarter results, driven by rapid revenue growth from its cloud computing unit. The company’s outlook for the fourth quarter was also solid, allaying investors’ fears that it was falling behind in the AI race. Revenue rose 13% year over year to $180.17 billion, beating expectations of $177.75 billion, according to estimates compiled by LSEG. Earnings per share under generally accepted accounting principles (GAAP) rose to $1.95, compared with $1.43 last year and LSEG’s forecast of $1.57 per share. Operating income was flat year-over-year at $17.42 billion, missing the consensus estimate of $19.7 billion. However, this quarter was negatively impacted by special charges with a total impact of $4.8 billion. Without these expenses, operating income would have been $21.7 billion. Why we have it Amazon may be widely known for online shopping, but it’s its cloud business that really makes its living. Advertising is another fast-growing industry with high margins. As management works to aggressively reduce delivery times and reduce overall costs, investment in solid e-commerce logistics infrastructure makes its online store the place to be. Prime uses free shipping and video streaming, as well as numerous other perks to keep users paying every month. Competitors: Walmart, Target, Microsoft, and Alphabet Last purchased: August 23, 2023 Start: February 2018 In a nutshell: The long knives have been out for Amazon since the last quarter, after Amazon Web Services (AWS) failed to experience the same kind of AI growth renaissance as its closest competitors, Microsoft Azure and Google Cloud. The talk since then has been that Amazon did not invest enough in capacity and was losing market share. This quarter, the company went a long way toward ending that conversation. While AWS may not be growing as fast as Azure or Google Cloud on a percentage basis, keep in mind that AWS comes from a much larger dollar base. “AWS is growing at a pace we haven’t seen since 2022, accelerating again to 20.2% year-over-year,” CEO Andy Jassy said in the earnings press release. “We continue to see strong demand in AI and core infrastructure and are focused on increasing capacity, adding more than 3.8 gigawatts (GW) of capacity in the last 12 months.” The company claims this represents more added power than other cloud providers and management has no intention of giving up. “You’ll see us continue to be very aggressive in investing in capacity as we see the demand. We’re making money on it right now as fast as we’re adding capacity,” Jassy added in the earnings release. The company plans to bring another GW of capacity online in the fourth quarter and plans to double its total capacity again by the end of 2027. Outside of AWS, we always like to point out the drivers of our long-term thesis on Amazon. What we want to see is operating margins continue to rise, both in North America and internationally. Much of this is due to Amazon’s ability to reduce the cost of serving online shoppers by unlocking efficiencies in its fulfillment and transportation networks. Additional growth from higher-margin revenue streams such as advertising is also a plus. As we said before, if margins are rising, the stock price should follow. You need to claw back some special charges to see margin expansion this quarter – but it’s there. As a result of the accelerating AWS story and continued solid margin performance, Amazon shares rose nearly 13% to nearly $252 in after-hours trading. If earnings hold up, that would be an all-time high, making up for a disappointing year for shareholders. After this better-than-expected quarter, we reiterate our 1 rating and raise our price target from $250 to $275. AMZN 1Y Mount Amazon 1-Year Return Commentary Revenue at cloud unit Amazon Web Services (AWS) rose 20.2% year over year to $33 billion. This growth rate is an acceleration from 17.5% in the second quarter. This is also much better than the Street’s estimate of 18%. Despite heavy investment, AWS’s operating income and operating margin were also better than expected. Although its margin fell to roughly 34.6% from 38% last year, it was slightly better than the 33.9% consensus estimate. AWS ended the quarter with a $200 billion backlog. That’s up about $5 billion from the second quarter, but Jassy said on the earnings call that that figure doesn’t include a few unannounced new deals in October, which totaled more than the total transaction volume for the entire third quarter. It’s worth noting that AWS opened its $11 billion artificial intelligence data center called Project Rainer on Wednesday. The project was built to support Anthropic’s AI model Claude. The data center cluster has about 500,000 of Amazon’s on-premises Trainium 2 chips, with plans to expand to one million by the end of the year. It was mostly revenue beats across the board for the company’s remaining business segments. Online stores, third-party seller services, and advertising services experienced significant revenue increases. Only brick-and-mortar stores and other stores missed this opportunity, each with less than $10 million in revenue. By geography, North American sales rose 11%, beating estimates by more than $1 billion. The reported operating margin of 4.51% missed estimates of approximately 7.11% and was down from 5.9% last year. However, if the $2.5 billion in special charges had been withdrawn, the margin would have been roughly 6.9%. Moreover, if there were no severance pay, this figure would be even higher. What is important is that underlying margins improved compared to last year. In the international segment, Amazon’s revenue rose 14%, beating estimates by nearly $250 million. Operating margins in the region decreased by approximately 69 basis points compared to last year, falling to 2.93%, below estimates of 3.52%. However, operating income was negatively impacted by various estimated costs. Stripping out these costs, we should see margin improvement in the coming quarters. On the capital expenditures (capex) side, Amazon invested approximately $34.2 billion in the third quarter, beating the consensus estimate of $31.8 billion. Capital expenditures were mostly driven by investments in AWS to support demand for AI and core services. The company currently expects full-year capital expenditures to be approximately $125 billion; That’s $8 billion more than last quarter. Additionally, Amazon expects to invest more in capital expenditures next year compared to 2025. The current 2026 consensus capex estimate on FactSet is $127.5 billion, but that figure is likely to be revised higher tomorrow. With earnings from major cloud computing “hyperscalers” now complete, we once again see all major players spending more than expected and signaling plans to invest more aggressively in the quarters and next year. Guidance Amazon’s fourth quarter 2025 guidance was also a sigh of relief. The company expects net sales to increase 10% to 13% annually to $206 billion to $213 billion. The $209.5 billion midpoint beats the $208.4 billion consensus. Fourth-quarter operating income is expected to be between $21 billion and $26 billion. This midpoint of $23.5 billion is roughly in line with the consensus of $23.775 billion. Guidance is important, but we’re always careful not to read too much into Amazon’s forecasts, given management’s history of under-promising and over-delivering. Case in point: The company reported another quarter in which both sales and operating income were above management’s upper limit. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of stocks.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
