Amazon.com ($AMZN) is poised to witness its operating margins in the cloud-computing sector peak in 2024, following a remarkable high achieved in the third quarter, as highlighted by BofA Securities in a note sent out on Friday. In its latest earnings report released late Thursday, the e-commerce powerhouse disclosed third-quarter results that exceeded Wall Street predictions, driven by impressive double-digit revenue growth from both its Amazon Web Services (AWS) cloud-computing unit and its advertising sector.
AWS margins achieved a new record of 38%, indicating robust performance, according to BofA. Amazon Chief Financial Officer Brian Olsavsky elaborated during the earnings conference call, stating, "We increased the estimated useful life of our servers starting in 2024, which contributed approximately 200 basis points to the AWS margin increase year over year in the third quarter." Looking ahead, the company estimates its capital expenditures for 2024 will be around $75 billion, with Chief Executive Andy Jassy suggesting even higher expenditures in 2025, predominantly allocated towards AWS initiatives.
This substantial investment is viewed as crucial for supporting long-term growth within the cloud division. In the third quarter, AWS sales surged by 19% on an annual basis, although this fell slightly short of the 20% growth anticipated by investors. BofA analyst Justin Post remarked, "Despite this, we believe AWS's $1.2 billion in quarter-on-quarter revenue growth will position it favorably against competitors." Additionally, Amazon plans to increase its capital expenditures for 2024 by $27 billion compared to the previous year, although the resulting higher depreciation costs may negatively impact AWS margins.
Post further stated, "We expect AWS margins to peak in 2024 and potentially decline toward 30% over time. The company anticipates higher spending next year driven by AWS and artificial intelligence-related projects." Jassy emphasized that Amazon's AI business has already grown into a "multibillion-dollar" operation and continues to expand at a rapid pace, achieving triple-digit growth year-over-year, and outpacing AWS's growth during its comparable phase. For the fourth quarter, Amazon projects operating income in the range of $16 billion to $20 billion.
Post noted that the upper range is considered a "positive" outcome, particularly as this period usually experiences lower margins and profits. He added, "Inbound efficiencies are aiding retail margins, and AWS is benefitting from strong capacity utilization and cost management initiatives. Management opines that inbound facility efficiencies are only beginning, and there is potential for international retail margins to converge with those in North America." In financial markets, Amazon shares rose by an impressive 6.3% in late-afternoon trading on Friday, bringing the stock's growth to about 30% year-to-date. BofA has revised its EPS projection for 2025 upward to $6.13 from a previous estimate of $5.59.
Revenue expectations have also been adjusted, now forecasting $707.08 billion, a slight increase from the earlier estimate of $700.9 billion. The brokerage has also lifted its price target for Amazon stock to $230 from $210 while reaffirming its buy recommendation. Price: 198.07, Change: +11.67, Percent Change: +6.26 $AMZN.