Amazon (NASDAQ:AMZN) shares had investors on edge ahead of the Q3 report, with concerns about retail margins and the impact of investments like Kuiper on growth. But those worries eased as Amazon’s strong Q3 results came with an operating income forecast that beat Wall Street’s expectations.
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The retail segment’s margin contributed half of the profit surprise vs. consensus, rising by 180 basis points year-over-year to reach 5.3%.
Loop Capital analyst Rob Sanderson, who ranks amongst the top 3% of Wall Street stock pros, noted that this margin level already surpasses “historic highs.” He further highlighted that the retail business now generates notably higher margins due to increased advertising and commissions revenue compared to previous periods.
In fact, Sanderson also thinks retail margin improvement has a “long way to go” yet. Fulfillment and shipping costs, as a percentage of GMV, remain considerably higher than in 2018, with management aiming to improve on those levels. And the company has identified ample opportunities to reduce service costs back to historical levels via outbound regionalization, inbound network reorientation, increased robotics usage, and other initiatives to optimize its extensive fulfillment operations.
Another key point revolves around the “bullish backdrop for AWS,” particularly where AI is concerned. Sanderson highlights that the AI potential for AWS seems limitless, with AI-driven revenue accelerating at a pace three times faster than core AWS during a comparable growth phase.
Segment revenue now stands at a $110 billion run rate. The operating margin reached an impressive 38% in Q3, significantly above expectations and setting a new all-time high. While the sequential improvement was partly driven by seasonal stock compensation effects, Sanderson says AWS’s strong operating efficiency, revenue mix, and scale make it a “structurally higher margin business.”
“We think current dynamics point to continuation of heightened margin with all cloud seeing providers seeing an abundance of demand and shortage of supply,” Sanderson went on to say. “A more aggressive pricing dynamic will return at some point, an environment that would unlock demand and drive revenue acceleration.” Interestingly, though, Sanderson expects the AWS segment margin to drop to 35% in 2025 and to 34% in 2026.
On the other hand, at $176 billion, Sanderson’s 2025 EBITDA estimate is now around 9% above his prior forecast, with the analyst calling for 15% EBITDA growth in 2026.
All told, Sanderson rates AMZN shares a Buy, while his $275 price target implies the stock will gain 32% over the coming months. (To watch Sanderson’s track record, click here)
Overall, Amazon stock has garnered a strong endorsement from Wall Street, with 44 Buy ratings and just one Hold in the last three months, culminating in a consensus rating of Strong Buy. At $238.35, the average price target implies an upside potential of 14.5%. (See AMZN stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
