The only holdup for AWS cloud growth is Nvidia’s supply.
After a couple strong years of gains, artificial intelligence tech stocks have seen volatility over the past summer and into third quarter earnings season.
After strong gains in 2023 and into the first half of 2024, concerns arose this past summer over two issues. One, cloud computing giants began greatly increasing their capital expenditures on data centers. That led investors to ask one, would there be a payoff for all that spending? That first concern led to a second concern; if these investments didn’t pay off soon, did that make AI a hype-driven bubble set to burst?
Fortunately, the largest cloud platform in the world, Amazon (AMZN 6.19%) just reported strong earnings last Thursday, the details of which should greatly reassure AI investors everywhere, especially those concerned about the near-term outlook for AI chip leader Nvidia (NVDA 1.99%).
Amazon Web Services posts eye-opening growth
Some investors had come to doubt Amazon Web Services (AWS), the largest cloud computing infrastructure provider in the world, over the past few years, after its growth decelerated in 2022 and 2023. However, it appears AI is heating up AWS’s growth prospects again.
In the third quarter, AWS revenue surged 19%, marking an acceleration over the prior year’s 12% growth, defying the law of large numbers. Not only was revenue growth robust, but cloud computing operating margins expanded from 30.3% a year ago to 38.1%, with AWS’s operating income surging an even more impressive 50%. While AWS operating margins can bounce around a lot, the general trend is quite positive. On a trailing 12-month basis, AWS’s operating margins expanded almost 10 percentage points, from 25.8% a year ago to 35.3%, which is a massive jump.
That means AI isn’t just providing strong growth for Amazon, but profitable growth. That last piece is really important, as virtually all big cloud companies are significantly expanding their investments in AI data centers. For Amazon specifically, its capital expenditures on property, plant, and equipment rose 81% to $21.2 billion last quarter. Therefore, to see all that spending pay off in terms of growth and margin in the near-term was a relief.
“Three times faster than cloud at this stage”
One of the more eye-opening quotations from last Thursday’s conference call with analysts was Amazon CEO Andy Jassy giving very positive color around the AI-specific part of AWS. He noted, “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 quote certainly seems to make the case that the AI revolution isn’t a fly by-night bubble waiting to burst. After all, we are really only about two years into the AI revolution, as ChatGPT was first unveiled back in November of 2022.
For reference, the original AWS cloud computing platform was first unveiled in 2006, and it’s pretty safe to say that if one had invested in Amazon in 2008, two years after AWS started, you would have done quite well indeed.
Great for Nvidia: “More demand that we could fulfill”
As if this news weren’t good enough for Amazon and AI stocks already, Jassy also noted that Amazon’s growth would have been even higher if not for capacity constraints:
I believe we have more demand that 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.
You heard that right. Jassy believes Amazon’s AI business can reaccelerate even further, with the only current constraint today being that of supply.
That spells lots of good things for Nvidia (NVDA 1.99%) and its upcoming earnings release. Nvidia’s stock sold off after its last earnings report on guidance that was strong, but a tad below “whisper” expectations on Wall Street. Yet we also know that was likely because of a one-quarter delay for its upcoming Blackwell chips.
The delay, having to do with a production mask, has been corrected, and Nvidia is now in production for Blackwell. Earlier this month, CEO Jensen Huang forecast “billions in revenue” for Blackwell in the fourth quarter, with some analysts anticipating $10 billion in Blackwell revenue or more in Q4.
Therefore, with Amazon and basically all cloud providers saying they are capacity-constrained for the demand they have, Nvidia’s guidance on its upcoming Nov. 21 earnings report should be quite strong indeed.
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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