Amazon Stock Gains On Strong Earnings, AI Push Boosts Cloud Growth

Amazon reported better-than-expected first-quarter earnings and revenue on Tuesday, sending its stock higher in after-hours trading. The e-commerce and cloud computing giant earned 98 cents per share on sales of $143.3 billion, exceeding Wall Street’s expectations of 84 cents per share on $142.7 billion in revenue. The strong results were driven by growth in advertising and cloud computing, with Amazon Web Services (AWS) seeing a significant boost from the appeal of its AI capabilities.

AWS Growth Accelerates, Driven by AI and Infrastructure Modernization

Amazon Web Services (AWS), the company’s cloud computing division, saw sales grow 17% year-over-year to $25 billion, beating consensus expectations of roughly 15% growth. According to CEO Andy Jassy, AWS has a “multibillion-dollar revenue run rate” related to AI. The combination of companies renewing their infrastructure modernization efforts and the appeal of AWS’s AI capabilities is reaccelerating the division’s growth rate.

AWS sales growth has accelerated in back-to-back quarters for the first time since an industrywide slowdown began in early 2022. The division is also becoming more profitable, with operating income jumping 84% to $9.4 billion and operating margin climbing to 37.6%, compared with 24% for the same quarter in 2023.

AWS accounted for 62% of Amazon’s total operating profit in the first quarter, highlighting its importance as a profit driver for the company. The strong performance of AWS helped Amazon’s overall operating income soar more than 200% in the quarter to $15.3 billion, far outpacing revenue growth.

Advertising and Third-Party Seller Services Continue to Surge

Amazon’s advertising business performed well in the first quarter, with sales surging 24% to $11.8 billion, just ahead of consensus estimates. The company recently started running ads in Prime Video, a move analysts predict could generate significant revenue over time. The advertising market overall has started growing again after a challenging 2022, with Meta, Snap, and Google parent Alphabet all reporting better-than-expected revenue growth driven by improvements in their ad businesses.

Revenue from third-party seller services, which includes commissions collected by Amazon, fulfillment, shipping fees, and other charges, continued to surge, growing 16% year-over-year to $34.5 billion. This segment has become an increasingly important contributor to Amazon’s overall sales growth and profitability.

Amazon’s North American operations also saw significant improvement, with operating income rising 450% to $5 billion, while sales advanced 12% year-over-year to $86.3 billion. The company’s international retail operations posted operating income for the first time since 2021, swinging to a $900 million operating profit compared with a $1.2 billion loss in the first quarter of 2023.

Strong Outlook, but No Dividend in Sight

Looking ahead, Amazon expects operating income of $10 billion to $14 billion in the second quarter, up from $7.7 billion a year earlier. Revenue is expected to grow 7% to 11% to between $144 billion and $149 billion, slightly below analysts’ expectations of $150.1 billion.

Despite the strong results and outlook, Amazon remains a standout among mega-cap internet companies in that it has yet to implement a quarterly dividend, even as cash and equivalents jumped to $73.9 billion in the quarter from $54.3 billion a year earlier. When asked about this on the earnings call, Chief Financial Officer Brian Olsavsky said Amazon’s top priority remains investing in long-term growth for the business, with plans for higher capital expenditures this year to build out AI-capable data centers.

Stock Performance and Valuation

Shares of Amazon rose over 5% in after-hours trading following the earnings release. The stock has seen little change over the past three years, moving slightly from levels of $165 in early January 2021 to around $180 now, underperforming the S&P 500’s 35% gain over the same period.

According to Trefis analysis, Amazon’s valuation is estimated at $205 per share, which is 14% above the current market price of around $180. This valuation is based on a revenue per share (RPS) estimate of around $61.48 and a price-to-sales (P/S) multiple of 3.3x in fiscal 2024.