Successful businesses inevitably undergo evolution and change over time. Some completely transform their business model, like Netflix shifting from mailing VHS tapes to becoming a streaming service. Others, like Alphabet and Meta, initially known as a search engine and social media platform, respectively, have diversified their offerings. While Amazon started as an online bookstore and expanded into selling various products and services, it too recognized the need to diversify further beyond its core retail business.
In the recently reported Q3 earnings, Amazon’s reliance on its core business became evident once again. Despite venturing into web and streaming services, the market is now re-embracing the importance of its core operations. The stock surged after beating bottom-line expectations, a result that might have previously led to a sell-off. Although AWS net sales disappointed and Q4 revenue guidance fell slightly short of forecasts, traders are now focused on fundamental business metrics such as margins and revenue growth from the previous quarter. This renewed market acceptance has driven the stock up by more than seven percent in premarket trading.
However, this recent development raises questions about the future implications. Are these better-than-expected results a one-time occurrence, or can they be repeated?
In its pursuit of growth, Amazon’s cloud services, a significant revenue contributor, slightly disappointed in the last quarter due to a delayed entry into the AI market. Investing over a billion dollars in Anthropic, a competitor of OpenAI, last month has provided a competitive advantage. By embracing generative AI and with their Bedrock AI service now operational, Amazon can tap into substantial growth potential. CEO Andrew Jassy believes this opportunity could be worth “tens of billions.” Although this growth will require funding, Amazon’s existing operations are preferable to borrowing, given current interest rates.
When companies reach the size and complexity of Amazon, investors tend to overanalyze results and focus on the performance of new business sectors. While evaluating these sectors is important, it is equally crucial to remember the solid foundation upon which Amazon was built. The expansion of this foundation in the last quarter is a positive indicator for the company’s future and its stock, regardless of the performance of other business units during that period.
Overall, Amazon’s reaffirmation of its core business and the potential for future growth in new sectors positions the company well for continued success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
