Key takeaways
- Amazon tripled its profit and exceeded revenue expectations for the third quarter
- But AWS falls far short of investor expectations
- Amazon’s stock price closed 0.6% lower but gained 5% after hours on assurances from CEO Andy Jassy following the investor call.
Earnings season is in full swing and this week the focus has been on big tech, with Amazon coming out early on Thursday. The shopping titan’s third quarter was very strong, blowing away revenue and profit expectations, but the stock price reaction was flat at best.
For what? Cloud computing captured Wall Street’s attention this quarter after seeing major tech companies invest billions in what tech companies promised would be an AI-fueled boom. Market leader AWS was in line with estimates, leading investors to want more from the growth area.
Here is the complete analysis of Amazon’s third quarter profits, developments in the cloud computing sector and the evolution of Amazon’s stock price on the markets.
What did Amazon’s earnings report look like?
E-commerce giant Amazon’s third-quarter sales were quite impressive. Sales reached $143.1 billion, up 13% from the same period last year and accelerating from the 11% growth seen in the second quarter. Consensus estimates predicted Amazon would hit $141.5 billion in sales.
Reported earnings came in at 94 cents per share, significantly higher than the 58 cents expected by analysts, while net income tripled to $9.9 billion from $2.9 billion a year earlier. It’s a sign that cost-cutting measures, such as laying off 27,000 workers and divesting unprofitable businesses, have borne fruit.
Advertising revenue was also better than expected, reaching $12.1 billion instead of the $11.6 billion analysts expected. Amazon’s core e-commerce division also recovered from a difficult 2022, growing 7% compared to the same period last year. Another bright spot is digital ads: ad revenue increased 26% year-over-year.
Of course, with Black Friday and Christmas approaching, Amazon’s fourth quarter is usually its busiest. So what did the company predict? Amazon expects to make between $160 billion and $167 billion in sales for the fourth quarter, which is well below the $166.6 billion predicted by Wall Street.
How did AWS perform?
Wall Street has been particularly focused on cloud computing revenues this week, with Amazon being no exception. AWS performed very well in the third quarter: the division generated revenue of $23.1 billion, up from 12.3% in the same period last year. Wall Street estimates were $23.2 billion.
It was because they “did well” that Wall Street was not impressed. Amazon CFO Brian Olavsky was quick to offer reassurance during a press conference, saying the Big Tech giant increased its AWS revenue by $900 million compared to last quarter.
But it was once again the mention of that sneaky phrase – customers focusing on “optimization of spend” – that caught investors’ attention. The fact that Amazon’s second quarter also saw a very similar result of $22.1 billion in sales has Wall Street wondering if AWS’s growth has now bottomed out.
Amazon enjoys the largest market share in the cloud computing sector, with 32%, compared to 22% for Microsoft Azure and 11% for Google Cloud. But warnings should be ringing at Amazon after Microsoft said its Azure cloud division saw 28% growth in the third quarter compared to last year, with three percentage points directly attributable to its investment in artificial intelligence .
The stock market reaction
Amazon’s stock price was volatile throughout the day, closing down 0.6% on Thursday but enjoying an after-hours rebound, where it gained more than 5%. You can thank CEO Andy Jassy for assuring on the investor conference call that AWS had landed some big contracts that would show up in the fourth quarter results. Amazon saw its stock price increase by 39% in 2023.
Google and Meta also suffered share price declines this week following their results. The former suffered its worst stock market decline since March 2020 after Google shares fell 9.5% on concerns that Microsoft was eating into its cloud computing market share. Meta warned of a slowdown in advertising revenue due to the ongoing conflict between Israel and Gaza, which suffered a 5.5% decline this week.
Microsoft is so far the only one to see its stock price rise during normal trading hours, climbing 3% after its earnings rose. The stock is up 39% year to date, boosted by its early investment in AI giant OpenAI, the maker of ChatGPT.
The essential
Amazon’s triple profits, successful cost-saving measures and better-than-expected revenue didn’t matter to Wall Street: all attention was on cloud performance. Revenue of $23.1 billion is nothing to sneeze at, but investors clearly expected more from the market leader – and with Microsoft pushing ahead in the AI space, the concern is real.
With concerns over interest rates, geopolitical uncertainty and ever-looming inflation, it’s no wonder that big tech has a high bar to clear. But the results this week were clear: step up cloud computing, or risk the wrath of Wall Street.