On Friday, Amazon.com experienced a nearly 6% surge, indicating that growth in its primary profit-generating sector, the cloud business, was gaining momentum after two years of sluggishness due to reduced client spending.

As it pursues Microsoft for AI business, Amazon rallies around the cloud recovery

The emblem of Amazon is visible as of November 15, 2022.

The company was poised to increase its market capitalization by more than $70 billion based on its premarket stock price of $127. Smaller competitors in the cloud industry, such as Microsoft and Alphabet, also saw gains of approximately 1% each.

Amazon CEO Andy Jassy expressed that the cloud business was stabilizing, with substantial expansions involving existing clients and new agreements expected to contribute to growth in the final quarter of the year.

He also highlighted the AI potential for Amazon Web Services (AWS), anticipating that this technology could generate “tens of billions of dollars in revenue over the next several years.”

This optimistic outlook was well-received on Wall Street, especially for the business segment responsible for the majority of Amazon’s profits, which had faced a slowdown during the pandemic as customers looked to reduce expenses.

Bernstein analysts noted in a client communication that “Tech investors can breathe a sigh of relief,” further indicating that AWS growth seems poised to regain momentum, with or without the influence of AI.

Approximately 19 brokerage firms have increased their price targets for Amazon’s stock, resulting in a median target of $173, as reported by LSEG data.

Amazon’s shares have experienced a 40% increase in value this year. However, they saw a decrease of nearly 8% in the last two days following Alphabet’s (GOOGL.O) warning about reduced spending by cloud customers.

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During the July-September quarter, Amazon recorded its initial quarter-on-quarter growth in cloud services in nearly two years, though the unit’s revenue was below expectations.

The 12.3% growth in Amazon Web Services (AWS) was notably slower compared to the 29% increase seen in Microsoft’s Azure cloud business, which exceeded market expectations. Google Cloud exhibited growth of 22.5% during the same period.

In terms of valuation, Amazon trades at 38.49 times its 12-month forward earnings estimates, while Microsoft is at 27.85 and Alphabet stands at 18.66.

While Amazon’s cloud business is larger than Microsoft and Google, it is perceived as lagging in the AI competition, where Microsoft is a frontrunner, particularly due to its investment in OpenAI and focus on major clients who are already using its services.

Amazon has been striving to catch up by making moves such as its September agreement to invest up to $4 billion in chatbot-maker Anthropic and the launch of its Bedrock AI service, which has garnered thousands of customers.

“Generative AI is a substantial catalyst that could reignite growth within the (AWS) franchise,” noted Global X analyst Tejas Dessai.

“We view some significant partnerships secured in this quarter as crucial for driving growth in the upcoming quarters.”

Reported by Aditya Soni in Bengaluru, with editing by Arun Koyyur.

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