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Amazon (AMZN) stock closed over 6% higher on Friday, Nov. 1, following the company’s stellar third quarter (Q3) financials. The tech giant delivered earnings of $1.43 per share, significantly surpassing analysts’ expectations of $1.14 per share. Amazon also reported revenue of $158.9 billion, topping Wall Street’s estimate of $157.3 billion.
Beyond just these positive numbers, Amazon is doubling down on key growth areas that could drive further stock gains in the future. Here’s a closer look at the catalysts that could make Amazon a long-term winner.
Growing Cloud Business
Amazon's cloud computing segment, Amazon Web Services (AWS), once again demonstrated strong growth. The segment posted $27.5 billion in revenue in Q3—a 19.1% year-over-year increase, up from 18.8% growth in Q2. AWS now sports an annualized revenue run rate above $110 billion. This shows the division's significance to Amazon’s overall financial performance and share price.
AWS continues to expand its cloud services and artificial intelligence (AI) offerings, driven by increasing demand from businesses moving to the cloud to leverage generative AI technology. AWS's robust functionality, enhanced security, and extensive partner ecosystem position it well for continued growth in this area. AWS’s AI capabilities are further bolstered by its collaboration with chip giant Nvidia and its custom-built chips, Trainium and Inferentia, which are experiencing strong demand. The upcoming Trainium2 chip promises improved pricing and performance, enhancing AWS's AI service offerings.
AWS also reported an operating income of $10.4 billion, a $3.5 billion increase year-over-year. This growth was supported by efficiency improvements, including infrastructure optimization and cost reductions. Additionally, a change in the estimated useful life of its servers added 200 basis points to AWS’s Q3 margins, leading to a year-over-year margin increase of 7.8%, bringing AWS’s operating margin to a remarkable 38.1%.
Expanding Digital Ad Revenue
Amazon's digital advertising business is advancing well as it leverages its vast reach and influence over consumer buying habits. As more businesses turn to Amazon’s platform to connect with customers, advertising has quickly become one of Amazon’s major revenue engines.
In its recent Q3 earnings report, Amazon reported $14.3 billion in revenue from advertising, marking an 18.8% growth compared to the previous year. This rapid expansion is fueled by solid demand for Amazon’s sponsored product ads—a trend showing no signs of slowing down. Amazon’s management has highlighted plans to further refine ad relevancy, which should drive even better performance for advertisers and strengthen the company’s competitive edge.
Beyond sponsored products, Amazon is exploring new ways to boost advertising revenue. This year, Amazon debuted ads in Prime Video, adding another layer to its digital advertising strategy. As Amazon’s video streaming service attracts millions of viewers, the potential for growth in this segment could be substantial. Additionally, Amazon is helping brands of all sizes create engaging ads through its new generative AI tools, which could attract even more advertisers to the platform.
Though Amazon hasn’t disclosed specific profit margins for its ad business, it’s likely a high-margin segment, especially when compared to Amazon’s traditional retail business. This growing ad revenue stream not only diversifies Amazon’s income sources but also adds to its profitability, making it a promising long-term growth driver for the company.
Efficiencies in Fulfillment and Leaner Cost Structure
Amazon is taking steps to improve its efficiency and reduce costs with a shift to a regional fulfillment network. By cutting delivery times and optimizing distribution costs, Amazon is enhancing the customer experience and improving its cost structure. This push for a leaner, cost-effective model is set to benefit the company’s long-term profitability.
A significant focus for Amazon right now is reducing costs while boosting profit margins. The company has upgraded its ability to spread inventory across fulfillment centers, which means products are stored closer to customers. This setup not only speeds up delivery, but also cuts down on transportation costs and enables more efficient packing.
Additionally, Amazon is expanding its same-day delivery services, one of the fastest and most cost-effective ways to get products to customers. To make this happen, Amazon is investing in new technologies, including robotics, to streamline operations, reduce costs, and improve safety within its fulfillment centers. These innovations are helping Amazon scale up its operations, aiming for faster delivery and greater efficiency.
The Bottom Line for Investors
Amazon’s latest earnings beat underscores its strength across diverse growth areas. Amazon is well-positioned to continue delivering for shareholders as it leans into cloud expansion, digital advertising, AI, and operational efficiencies.
Given its strong fundamentals and a clear roadmap for future innovation and profitability, Amazon remains a compelling choice for investors looking at long-term growth.
Wall Street analysts are optimistic, giving Amazon a "Strong Buy" consensus rating. Their average price target of $226.50 suggests a potential 15% gain from current levels.
