Amazon’s US$300 billion jump puts stock back in AI conversation

With momentum now behind AWS, investors see plenty of room for the multiple to expand. Photo by PAU BARRENA/AFP via Getty Images/Postmedia files

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With earnings results last week showing the fastest quarterly growth for Amazon Web Services since 2022 followed by a US$38 billion cloud deal with OpenAI, there’s mounting evidence that momentum is back for the critical unit. The one-two punch has delivered a 12 per cent gain in four trading days, adding about US$300 billion in market value to the stock and sending it to its first record since February.

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“Taken together, the results and OpenAI deal suggest that the acceleration in AWS growth could be sustainable,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, which has about US$7 billion in assets. “Investors are going to have to take Amazon more seriously when they’re considering how to invest in the AI space, since this shows it is one of the few companies that’s coming through and delivering a tangible return from all the money it’s spending.”

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AWS has long been important to Amazon’s stock performance because of the disproportionate share of operating income it generates compared with the retail business. Up until the third quarter, AWS’s revenue growth had been slowing while rivals like Alphabet Inc.’s Google Cloud, Microsoft Corp.’s Azure and Oracle Corp. were gaining steam, weighing on Amazon’s shares.

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While the stock’s rally has helped make up for a lot of lost ground, Amazon remains an underperformer this year. The stock’s 14 per cent gain trails the S&P 500 and Nasdaq 100, which are up 16 per cent and 22 per cent, respectively. Amazon is also lagging behind three of the other six companies that comprise the so-called Magnificent Seven — Nvidia Corp., Microsoft and Alphabet.

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Bulls are betting the under-performance won’t last for long, however. Prior to last week, Amazon’s valuation had been steadily trending downward, falling below 24 times estimated profits in mid-October for just the second time since the 2008 financial crisis. With momentum now behind AWS, investors see plenty of room for the multiple to expand.

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At 27 times projected profits, Amazon still trades at a significant discount to its average over the past decade, which stands at 47 times, according to data compiled by Bloomberg.

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Amazon shares could nearly double if its earnings multiple returns to levels from a few years ago, according to Evercore ISI analyst Mark Mahaney.

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“With materially increasing odds that AWS has recovered to becoming a sustainably 20 per cent plus revenue growth segment, the stock opportunity ahead is for a material AMZN re-rating,” he wrote in a research note on Nov. 3, referring to Amazon by its ticker symbol.

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AWS’s revenue growth clocked in at 20 per cent in the third quarter and is expected to expand in each of the next two quarters, according to the average of analyst estimates compiled by Bloomberg. The improved outlook has helped lift estimates for Amazon’s 2026 earnings, which are up 2.5 per cent over the past week.