Best Quarter Since 2021, But Cloud Division Underwhelms

Key takeaways

• Amazon tripled its profit and surpassed revenue expectations for the third quarter
• But AWS came in a hair short of investor expectations
• Amazon’s stock price closed 0.6% down but gained 5% in after-hours trading with CEO Andy Jassy’s reassurance on the investors’ call

Earnings season is in full swing, and this week, the focus has been on Big Tech, with Amazon out the doors early on Thursday. The shopping titan’s third quarter was very strong, blowing revenue and earnings expectations out of the water, but the stock price reaction was flat at best.

Why? Cloud computing has captured Wall Street’s attention this quarter after watching Big Tech invest billions into what tech companies promised would be an AI-fueled boom. Market leader AWS was in line with estimates, which has left investors wanting more from the growth area.

Here’s the full analysis of Amazon’s earnings for the third quarter, what’s been going on with the cloud computing sector and how Amazon’s stock price fared on the markets.

What did Amazon’s earnings report look like?

E-commerce giant Amazon’s third-quarter sales were pretty impressive. Sales arrived at $143.1 billion, up 13% from the same period last year and accelerating from the 11% growth seen in the second quarter. Consensus estimates had predicted Amazon to hit $141.5 billion in sales.

Earnings were reported as 94 cents a share, sharply above the 58 cents anticipated by analysts, while net income tripled to $9.9 billion from $2.9 billion a year earlier. It’s a sign that cost-cutting exercises like laying off 27,000 workers and divesting unprofitable businesses have worked.

Advertising revenue was also above expectations, arriving at $12.1 billion instead of the $11.6 billion in revenue analysts had forecast. Amazon’s core e-commerce division also recovered after a difficult 2022, growing by 7% compared to the same time last year. Digital ads were another bright spot: ad revenue climbed 26% from a year earlier.

Of course, with Black Friday and Christmas coming up, Amazon’s fourth quarter is usually its busiest one. So what has the company predicted? Amazon expects to make between $160 billion and $167 billion in sales for the fourth quarter, which was quite a bit less than the $166.6 billion Wall Street predicted.

How did AWS perform?

Wall Street has been unusually focused on cloud computing revenue this week, with Amazon no exception. AWS performed just fine in the third quarter: the division brought in $23.1 billion in revenue, up from 12.3% the same time last year. Wall Street estimates had come in at $23.2 billion.

It’s because they just did ‘fine’ that Wall Street was unimpressed. Amazon CFO Brian Olavsky was quick to reassure in a press conference, saying the Big Tech giant had increased AWS revenue by $900 million from the last quarter.

But it was the mention of that sneaky sentence again – customers focusing on “spending optimization” – that investors latched onto. The fact that Amazon’s Q2 also saw a very similar result of $22.1 billion of sales has Wall Street wondering whether AWS’ growth has now bottomed.

Amazon enjoys the biggest market share in the cloud computing sector, with 32% compared to Microsoft Azure’s 22% and Google Cloud’s 11%. But warnings bells should be ringing at Amazon after Microsoft said its Azure cloud division had grown by 28% for the third quarter compared to last year, with three percentage points directly attributable to its artificial intelligence investment.

The stock market reaction

Amazon’s share price was volatile throughout the day, closing 0.6% down on Thursday but benefiting from a rally in after-trading hours, where it gained over 5%. You can thank CEO Andy Jassy’s reassurances on the investors’ conference call that AWS had landed some chunky contracts that would show up in the fourth-quarter results. Amazon has seen a 39% boost to its share price in 2023.

Google and Meta also suffered share price falls this week after their earnings. The former suffered its worst stock drop since March 2020 after Google shares fell 9.5% over concerns Microsoft was eating into its cloud computing market share. Meta warned of ad revenue softening thanks to the ongoing conflict between Israel and Gaza, suffering a 5.5% decline this week.

Microsoft is the only one so far to have seen a stock price gain during regular trading hours, climbing 3% after its earnings beat. The stock has seen a 39% gain since the start of the year, boosted by its early investment into AI behemoth OpenAI, the creator of ChatGPT.

The bottom line

Amazon’s tripled profits, successful cost-saving measures and better-than-expected revenue didn’t matter to Wall Street: all of the focus was on cloud performance. $23.1 billion in revenue isn’t to be sniffed at, but investors clearly expected more from the market leader – and with Microsoft pulling ahead with AI, the concern is real.

With worries over interest rates, geopolitical uncertainty, and inflation still looming, it’s no wonder Big Tech has a high bar to vault over. But this week’s results have been clear: step up on cloud computing, or risk Wall Street’s wrath.