Amazon shares soar as cloud growth beats expectations

By Deborah Mary Sophia and Greg Bensinger

(Reuters) -Amazon.com shares soared on Thursday after the company forecast quarterly revenue largely above Wall Street estimates as its cloud services unit turned in its largest growth rate in nearly three years.

The online retailer benefited as businesses continue to spend relentlessly on artificial intelligence software development. Massive cloud demand is helping the tech company ease the pressure from softer growth at its e-commerce business, which is gearing up for the critical holiday season amid weakness in consumer confidence stemming from global trade uncertainty. 

Shares of Amazon soared 14% in extended trading, lifting the company's market value by about $330 billion. A stock rally of the same size in Friday's official trading session would make it Amazon's biggest one-day percentage gain since 2015. 

“AWS is growing at a pace we haven’t seen since 2022," CEO Andy Jassy said in a statement. "We continue to see strong demand in AI and core infrastructure, and we’ve been focused on accelerating capacity."

CLOUD REVENUE JUMPS

Its cloud unit, Amazon Web Services, reported a 20% rise in revenue in the third quarter ending in September, compared with estimates of a 17.95% increase. Amazon shrugged off a tough prior week when an extended outage at AWS felled many of the most popular websites and consumer apps. 

Amazon has been the worst-performing stock among the "Magnificent 7" megacap tech companies, due in part to a nagging reputation as a laggard in AI development. 

"The report confirms Amazon’s operations are firing on all cylinders after a year of relative underperformance," said Ethan Feller, stock strategist at Zacks Investment Research. He said despite the stock's nearly flat growth this year, "the company’s fundamentals never meaningfully weakened." 

Amazon projected total net sales of between $206 billion and $213 billion for the fourth quarter, while analysts on average were expecting revenue of $208.12 billion, according to data compiled by LSEG. 

The strong results from AWS, the world's largest cloud provider, followed stellar cloud revenue growth reported on Wednesday by Microsoft's Azure and Google Cloud, the No. 2 and No. 3 players in the industry, respectively. 

Microsoft, Google parent Alphabet and Facebook owner Meta all announced plans for higher annual capital expenditures as they pour money into chips and data centers.

BIG TECH CONTINUES AI SPENDING

Jassy's comments echoed those from rival CEOs, indicating Big Tech has no plans to pump the brakes on AI spending despite Wall Street expressing concern about a possible investment bubble. Companies, including Amazon, are introducing AI into nearly every facet of their operations in hopes of reducing costs and boosting productivity.

On Wednesday, Federal Reserve Chair Jerome Powell said he did not believe the AI boom is a speculative bubble like the dot-com era, when many companies were "ideas rather than businesses." Today’s AI leaders “actually have earnings," he said. He added that AI investments - especially in data centers, chips, and infrastructure - were a major source of economic growth. He did warn about AI's impact on the labor market.

Amazon Chief Financial Officer Brian Olsavsky said he expected full-year capital expenditures to be around $125 billion and higher spending next year, without providing details. The company booked $89.9 billion in capital expenditures through the first three quarters, he said.

AWS typically accounts for a little more than 15% of Amazon's total revenue, but the segment is a huge profit engine, making up roughly 60% of the company's total operating income. The unit reported revenue growth of 17.5% in the second quarter. 

Advertising was another bright spot. Sales increased 24% from a year earlier to $17.7 billion. The company has been placing greater emphasis on sponsored product listings and finding new spaces for higher ad volume, such as Echo Show screens and hi-tech grocery shopping carts.

Seattle-based Amazon took a $1.8 billion charge for severance costs. On Tuesday, it announced it had cut 14,000 corporate jobs, part of a plan that could result in around 30,000 job losses in aggregate. It had added about 32,000 workers from this year's second quarter through the third for a workforce of 1.58 million people.

Results were also weighed down by a one-time $25 billion charge for a settlement reached with the Federal Trade Commission over allegations that Amazon tricked consumers about their Prime memberships.  

(Reporting by Deborah Sophia in Bengaluru and Greg Bensinger in San Francisco; additional reporting by Noel Randewich; Editing by Anil D'Silva and Rod Nickel)