AI technology stocks have experienced ups and downs during the summer and into the earnings reports of the third quarter, following a period of strong growth.
After solid gains in 2023 and the first half of 2024, concerns emerged this summer about two main issues. First, cloud computing giants significantly increased their spending on data centers, leading investors to wonder whether these high expenditures would result in satisfactory returns. This initial worry then sparked a secondary concern: if the investments failed to yield results quickly, could AI be a hype-driven bubble on the verge of bursting?
Fortunately for investors, the world’s largest cloud platform, Amazon (NASDAQ: AMZN), reported strong earnings last Thursday, bringing reassurance to AI stakeholders, particularly those anxious about the near-term performance of AI chip leader Nvidia (NASDAQ: NVDA).
AWS Shows Impressive Growth
Some investors had expressed doubt about Amazon Web Services (AWS) over the past few years due to slowed growth in 2022 and 2023. However, AI appears to be revitalizing AWS’s growth potential.
In the third quarter, AWS revenue jumped 19%, up from 12% growth the previous year, demonstrating resilience despite the size of its existing market. Not only was revenue growth strong, but operating margins in cloud computing improved from 30.3% last year to 38.1%, with AWS’s operating income surging an impressive 50%. While AWS’s operating margins can fluctuate, the overall trend remains encouraging. On a trailing twelve-month basis, AWS’s operating margins climbed nearly 10 percentage points from 25.8% to 35.3%. This significant increase reflects profitable growth for Amazon, all attributable to AI advancements.
AI Growth Outpaces Cloud Development
During last Thursday’s analyst call, Amazon CEO Andy Jassy made striking comments regarding the AI segment of AWS. He stated, “AWS’s AI business is a multibillion-dollar revenue run-rate business that continues to grow at a triple-digit year-over-year percentage, and is growing more than three times faster at this stage of its evolution as AWS itself grew — and we felt like AWS grew pretty quickly.”
Image source: Getty Images.
This indication supports the view that the AI revolution is more than just a short-lived trend. With ChatGPT debuting only in November 2022, we have merely scratched the surface of this technological shift. For comparison, AWS itself launched in 2006, and investors who entered Amazon two years later in 2008 saw significant returns.
Nvidia Benefits from Increased Demand
Adding to the positive sentiment for Amazon and AI companies, Jassy remarked that Amazon’s growth could have been even higher if not constrained by capacity:
I believe we have more demand than we could fulfill if we had even more capacity today. I think pretty much everyone today has less capacity than they have demand for. … I actually believe that the rate of growth there has a chance to improve over time as we have bigger and bigger capacity.
This further demonstrates Amazon’s confidence in ramping up its AI business as demand outstrips current supply. Consequently, this is encouraging news for Nvidia (NASDAQ: NVDA) ahead of its upcoming earnings report. Nvidia’s stock dipped after its last earnings due to guidance that, while strong, fell slightly short of Wall Street’s expectations. However, the company recently resolved production delays for its Blackwell chips, which CEO Jensen Huang forecasts could generate “billions in revenue” in the fourth quarter. Analysts estimate Nvidia could bring in $10 billion or more from Blackwell in Q4.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Billy Duberstein and/or his clients have positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
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