This high-flying growth stock appears to be in great shape to keep the momentum going.
Anyone who thought that the joyride Amazon (AMZN 6.83%) has given investors this year was over might be changing their minds now. The e-commerce and cloud services giant’s shares popped close to 8% higher on Friday. This big gain came after Amazon reported better-than-expected third-quarter earnings results following the market close on Thursday.
And that joyride could last a lot longer. In Amazon’s Q3 conference call, CEO Andy Jassy mentioned five key reasons why his company’s stock could continue to soar.
Amazon Web Services (AWS) revenue jumped 12% year over year in Q3 to $23.1 billion. Sure, that growth rate wasn’t as strong as what Microsoft and Alphabet posted for their cloud units. However, Jassy noted AWS’ $919 million in incremental sequential revenue “looks like the most absolute growth of any of the players out there.”
What should be especially encouraging is that Jassy said customer optimization on AWS is “meaningfully attenuating.” Translation: Customers aren’t curtailing their spending on the cloud platform as much as they did earlier this year. Jassy expects this positive trend to continue.
AWS generated over 62% of Amazon’s operating income in Q3. If customers spend more on cloud services, Amazon’s bottom line should improve considerably going forward. And when earnings move higher, the share price tends to follow.
Winning more dollars from existing AWS customers is good; attracting new customers is even better. Jassy gave investors positive news on this front in the Q3 call, stating, “[W]e’re seeing the pace and volume of closed deals pick up, and we’re encouraged by the strong last couple of months of new deals signed.”
He added that the new deals signed in September that go into effect in October “[are] higher than our total reported deal volume for all of Q3.” Amazon will feel the impact of the revenue from these new deals over several years.
Why this deal volume is picking up is also important to understand. Jassy ticked off several factors, including AWS’ functionality, performance, and customer service. He also mentioned that customers’ perception of the company’s vision and innovation, especially in generative artificial intelligence (AI), is key.
Jassy has said several times in the past that at least 90% of global IT spending is still on-premises, with only a small percentage in the cloud. He reiterated in the Q3 call that Amazon’s management believes “that equation is going to flip.” And he thinks the flipping will accelerate beginning next year.
The shift to the cloud stalled somewhat in 2023, due in large part to concerns about the economy. However, Jassy predicts that many companies will return to their plans to transition to the cloud in 2024 and 2025. As the largest cloud provider with the most functionality, AWS stands to benefit tremendously from this trend.
Amazon’s profits more than tripled year over year in the third quarter to $9.9 billion. The company’s cost-cutting initiatives are paying off. But there’s reason to believe that Amazon’s profitability will improve even more in the near future.
When asked by an analyst about Amazon’s investment in warehouse robotics, Jassy said that it’s already “made a huge difference for us.” He cited higher productivity, lower costs, and increased safety due to the use of robots in the company’s warehouses.
Jassy also revealed that Amazon has “a very substantial investment of additional robotics initiatives.” He said that many of these initiatives “are coming to fruition in ’24 and ’25 that we think will make a further additional impact on the cost and productivity and safety in our fulfillment centers.”
Amazon makes a ton of money from its Prime service. Jassy highlighted the importance of the company’s video streaming service in attracting subscribers, stating, “Prime Video continues to be an integral part of the Prime value proposition, where it’s often one of the top two drivers of customers signing up for Prime.”
Jassy added, “We also have increasing conviction that Prime Video can be a large and profitable business in its own right.” If Prime Video becomes a profit center rather than a cost center, it could make a huge financial impact for Amazon. And investors should enjoy their joyride even more.
