Amazon stock closed at a new all-time high of $254 on November 3, after the company revealed a deal with OpenAI.
The $38 billion deal, which could continue to grow over the next seven years, allows OpenAI to use Amazon Web Services’ infrastructure, with Amazon eventually building out additional dedicated infrastructure for the company.
AWS is “to provide OpenAI with Amazon EC2 UltraServers, featuring hundreds of thousands of chips, and the ability to scale to tens of millions of CPUs for its advanced generative AI workloads,” according to a company statement.
*Amazon stock is up 14% year to date.*Noah Berger/Getty Images for Amazon Web Services
For Amazon (AMZN), the deal arrives at a pivotal time. The company’s recent third-quarter earnings report revealed AWS revenue climbed 20% year over year to $33 billion, surpassing analyst expectations.
Operating income for the segment rose 9% to $11.4 billion, also beating estimates and accounting for about two-thirds of Amazon’s total operating profit.
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“We continue to see strong demand in AI and core infrastructure, and we’ve been focused on accelerating capacity – adding more than 3.8 gigawatts in the past 12 months,” said Amazon CEO Andy Jassy in a statement.
The OpenAI deal may release a signal that Amazon is no longer being left behind in the AI infrastructure race, particularly in comparison to cloud provider rivals such as Microsoft (MSFT) and Alphabet (GOOGL).
OpenAI and Microsoft last week updated their partnership, removing Microsoft’s “right of first refusal” as OpenAI’s exclusive cloud provider.
Alphabet and Microsoft also reported third-quarter results recently. Google’s cloud revenue increased 34% during the quarter, and Microsoft Azure posted growth of 40%.
Wedbush analysts raised the firm’s price target for Amazon to $340 from $330, reiterating an outperform rating, according to a research note published November 3.
The analysts call Amazon’s partnership with OpenAI a move in the right direction on broadening AI services. They also highlighted AWS’s potential.
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“We are encouraged by the implied level of demand in the coming quarters given the pace of backlog growth and a higher capex guide for 2025,” the analysts wrote, adding that AWS has doubled its capacity relative to 2022, and is on pace to double again by 2027.
Wedbush said AWS’s strong revenue growth reported in Q3 reflects increased capacity and “encouraging” demand.
The firm believes that Amazon’s current valuation is “attractive” and sees room for further multiple expansion.