Why Amazon Rallied in October

Shares of Amazon (NASDAQ: AMZN) rallied 11.2% in October, according to data from S&P Global Market Intelligence.

Amazon's stock actually struggled through most of the month, as heightened tensions between the U.S. and China caused tech investors to take some risk off the table after a strong run.

However, Amazon delivered much better-than-expected earnings on Oct. 30, especially in its key Amazon Web Services segment, which some had feared was losing share in the age of generative AI.

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Amazon delivers, and faster than expected

In the third quarter, Amazon delivered 13.4% revenue growth to $180.2 billion, while earnings per share rose 36.4% to $1.95 per share, with both figures beating expectations.

There were positive developments across Amazon's entire business, but the headline was likely the 20.2% growth in Amazon Web Services. That was the segment's highest growth since 2022, and an acceleration over the prior quarter's 17% growth.

Some investors had grown nervous that AWS hadn't been growing as fast as some of its cloud rivals, and that it may have been missing out on big AI workloads. However, the AWS acceleration appeared to show Amazon wasn't missing the AI party -- in fact, it may be leading.

Amazon noted it had brought on 3.8 gigawatts of data center power online in the past 12 months, which the company claims was more than any other cloud provider. And the quarter also saw AWS bring its Project Rainier online, an absolutely massive AI data center filled with nearly 500,000 of Amazon's in-house designed Trainium2 chips.

Project Rainier is being used by Anthropic, the GenAI startup and OpenAI rival in which Amazon has invested billions of dollars. Meanwhile, Anthropic received some positive press as well. Late in the month, the Wall Street Journal wrote that Anthropic had become the favored LLM among many enterprises relative to OpenAI, garnering more enterprise market share and revenue per user.

But Amazon's revenue acceleration wasn't only relegated to Amazon's cloud business, as the e-commerce segments also showed strong results. Third-party sales on Amazon's e-commerce platform accelerated 11% from 10% in the prior-year quarter, while advertising revenue accelerated three percentage points to 22%, up from 19%.

Amazon noted that absent an FTC settlement and severance payments from recent cost cuts, North American operating margins would have been 6.9%, a full percentage point higher than the prior-year quarter, and international operating margins would have expanded year over year.

All in all, the report put to rest some of the fears that had caused Amazon to lag other "Magnificent Seven" rivals since the launch of generative AI nearly three years ago.

Amazon may be the big cap stock to watch

After the end of the month, Amazon inked a new cloud deal with OpenAI, despite Amazon's partnership with Anthropic. That somewhat proved AWS' strengths as a cloud for AI computing. Meanwhile, Amazon continues to grow its e-commerce business, ad revenue, and expand margins in its "legacy" e-commerce business. AI and automation should only continue to help on these fronts going forward.

Amazon has generally lagged the performance of the other Magnificent Seven names since the end of the pandemic, but now may be primed for outperformance if it continues to execute.

Billy Duberstein and/or his clients have positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.