'Fast Money' traders react to Amazon Q3 results

Key Concepts

• AWS (Amazon Web Services): Amazon's cloud computing segment.
• Operating Margin: A measure of profitability, calculated as operating income divided by revenue.
• Relative Performance: How a stock or asset performs compared to a benchmark index (e.g., S&P 500, NASDAQ 100).
• AI (Artificial Intelligence): The development of computer systems able to perform tasks normally requiring human intelligence.
• Cloud Segment Growth: The rate at which a company's cloud services revenue is increasing.
• Market Share: The percentage of a market that a specific company controls.
• Prime Subscription Fees: Revenue generated from Amazon's Prime membership program.
• Operational Fulfillment Efficiencies: Improvements in the efficiency of Amazon's logistics and delivery operations.
• Reacceleration in Growth: A situation where a company's growth rate, after a period of slowing down, begins to increase again.
• Azure and GCP (Google Cloud Platform): Competitors to AWS in the cloud computing market.
• Margin Pressure: A situation where a company's profit margins are declining.
• Advertising Business: Amazon's revenue generated from advertising on its platform.
• Monetization: The process of converting an asset or service into revenue.
• E-commerce: The buying and selling of goods and services over the internet.
• Alpha: Investment performance that is independent of the overall market's performance.
• Bear Market: A prolonged period in which investment prices fall.
• Overhead Supply: In technical analysis, refers to the volume of shares held by investors who bought at higher prices, potentially creating resistance to further price increases.

Amazon's Q4 Earnings and AWS Performance

The discussion centers on Amazon's recent earnings report, which significantly beat expectations, particularly in its AWS segment.

• AWS Performance: AWS demonstrated a 17% year-over-year growth last quarter. This figure is crucial, as a lower growth rate would have likely resulted in a significant stock price decline. The actual performance, exceeding expectations, has led to a positive market reaction.
• Operating Margins: A key highlight is the improvement in Amazon's operating margins, which have reached 12%. This is a substantial increase from previous periods where margins were as low as 3-4%. This improvement is seen as a sign that Amazon is executing its strategies effectively and justifies its current valuation.
• Cloud Growth Reacceleration: While competitors like Microsoft Azure and Google Cloud Platform (GCP) have been growing their cloud businesses faster, AWS, despite having more market share, is now showing a reacceleration in its growth. This is a positive development for Amazon, especially given concerns that Google and Microsoft were "eating their lunch."

Technical Analysis and Stock Outlook

The stock's technical performance is also analyzed, with a focus on its recent price action.

• Breaking Prior Highs: The stock has moved through its previous highs, which, from a technical perspective, suggests it is entering "free territory" with no significant overhead supply. This technical setup indicates potential for further upward movement.
• Catch-Up Play: Amazon has been a "major lagger" in terms of relative performance compared to the S&P 500 and NASDAQ 100 since its peak in 2020. The current rally is seen as a "catch-up" phase, with the gap up having room to run.
• Historical Underperformance: Since the autumn of 2020, Amazon's stock has risen by 30%, while the S&P 500 is up 100% and the NASDAQ 100 is up 150%. This significant underperformance has led to a perception of "no alpha" in Amazon for four years, making the current positive momentum particularly noteworthy.

AI and Future Growth Drivers

The conversation touches upon the impact of AI and other factors on Amazon's future prospects.

• AI Stories and Growth: The earnings report is viewed as a positive indicator for "AI stories," demonstrating that companies can achieve growth alongside AI investments. The strong AWS performance provides tangible results for the AI narrative.
• Prime Subscription Fees: An anticipated increase in Prime subscription fees in 2026 is mentioned as a potential future revenue driver.
• Operational Efficiencies: The possibility of extracting further "operational fulfillment efficiencies" from the system is also noted as a lever Amazon can pull.
• Margin Pressure from AI Monetization: A potential future challenge is the pressure on Amazon's advertising business. As OpenAI and other AI models look to monetize through advertising and e-commerce, they could compete with Amazon's highly profitable ad segment. The timing of this pressure is uncertain, with estimates ranging from Q1 2026 to 2027.

Key Arguments and Perspectives

• Positive Outlook Despite Past Underperformance: While acknowledging Amazon's significant underperformance relative to broader market indices over the past four years, the current quarter's results and technical breakout suggest a positive short-to-medium term outlook.
• AWS as a Key Driver: The strong performance and reacceleration of AWS growth are seen as the primary catalysts for the stock's recent move.
• AI Validation: The earnings report provides evidence that AI investments can translate into real growth, countering concerns about an AI bubble.
• Uncertainty on Future Margin Pressure: There is acknowledgment of potential future pressure on Amazon's advertising margins due to AI-driven competition, though the exact timing remains unclear.

Notable Quotes

• "12% operating margin so they're obviously doing things the right way and it's deserved of even this valuation which is not ridiculous." (Implied speaker, likely a financial analyst)
• "You're through those prior highs. I think this stock can continue to go higher in the back of this quarter." (Implied speaker, likely a technical analyst)
• "You need to see that they're having the growth to go along with it." (Courtney, referring to AI stories)
• "The fact that you're finally seeing their cloud um their cloud segment is actually growing faster than expected." (Implied speaker, likely a financial analyst)
• "I thought of all these names this one was probably going to be the worst result." (Implied speaker, expressing surprise at Amazon's strong performance)
• "That's going to be something that's going to be a problem as OpenAI and some of these other models look to monetize. They're going to do it through advertising and they're going to do it with e-commerce and I think that's going to be put pressure on this ad business for Amazon." (Implied speaker, discussing future competitive threats)
• "The this setting up was the worst setup. It turns out to be the best performer." (Implied speaker, referring to the stock's performance relative to expectations)
• "If this stock is up since the autumn of 2020, 30%, the S&P is up 100 and the NASDAQ 100's up 150. Is it a winner or isn't it?" (Implied speaker, highlighting historical underperformance)
• "If you went to a cocktail party this weekend and bragged to your friends that you're up 30% in Amazon and they looked at you and said loser the bur market's up 100%." (Implied speaker, illustrating the stock's relative weakness)

Conclusion

Amazon's recent earnings report, particularly the strong performance of AWS and improved operating margins, has led to a positive reassessment of the stock. Technically, the stock has broken through key resistance levels, suggesting further upside potential. While the company has historically underperformed broader market indices, the current momentum indicates a potential "catch-up" phase. Future growth drivers include anticipated increases in Prime subscription fees and operational efficiencies. However, potential margin pressure on the advertising business from AI-driven competition remains a long-term concern.