Strong earnings results from two technology giants helped stocks jump solidly higher today. The S&P 500 (^GSPC 1.20%) gained 1.1% to move back into positive territory for the year while the Dow Jones Industrial Average (^DJI 2.01%) ended up 0.9%.
Online retailer Amazon.com (AMZN +0.35%) and software king Microsoft (MSFT +1.22%) both announced their third-quarter earnings results before the market opened. Investors reacted by pushing up both companies' share prices. In fact, between the two stocks, an additional $70 billion of market capitalization was created in the span of this single trading day.
Amazon shows off its strong position
Amazon shares rallied today as it added almost $20 billion to its market cap. That number might seem ridiculous when compared to the tiny $79 million of net income it actually earned this quarter. But Wall Street chose to focus on a few bigger numbers out of Amazon.
Take 23%, which is the pace at which sales grew in the third quarter. Analysts were expecting a more modest, but still huge, 21% revenue pop. CEO Jeff Bezos also forecast sales to improve by as much as 25% in the fourth quarter, translating into a $37 billion haul. With online selling taking up an ever greater share of the retailing industry, Amazon is clearly benefiting from this fundamental shift in buying behavior.
Investors also zeroed in on this number: 25%. That's the profitability result for Amazon's cloud platform business, AWS. The division posted a 78% sales gain to hit $2.2 billion and is now running at a $7 billion annual rate. But despite more than a dozen price cuts in the last year, profitability is surging. That 25% operating income margin was a big improvement both from the prior quarter's 21% and the 8% it logged a year ago.
With growth like that, it's anyone's guess as to how big AWS can ultimately get, or how much profit it can generate over the long term. But it's clear that this business, similar to the retailing operations, is well positioned to capitalize on a major business shift.
Microsoft hits a new high
Microsoft finished the day up 12% and touched a new 15-year high after announcing surprisingly strong third-quarter results. Yes, sales fell 7% to $21.7 billion. But it was actually a more moderate 2% drop after accounting for exchange rate swings. And the result beat Wall Street targets of $21.1 billion by a hefty margin.
Mr. Softy's earnings per share also came in ahead of estimates, improving to $0.67 compared to $0.65 last year and the $0.59 that analysts were expecting. "We're pleased with our operating results this quarter," Chief Financial Officer Amy Hood said in a press release, while highlighting the software giant's double-digit profit growth.
The business was helped by a spike in cloud revenue from the Office 365 subscription service, where the user base grew by 3 million, to pass 18 million customers. Microsoft's enterprise cloud platform services also clocked accelerating growth, with Azure revenue doubling year over year.
Office 365 added 3 million subscribers this quarter. Image source: Microsoft.
Those gains helped offset another big drop in the personal computing business -- although not as large a dip as the broader industry suffered. Windows revenue slipped by 6% as the PC market continued to shrink. Meanwhile, phone revenue tanked by 54%.
Yet investors chose to overlook those concerns and focus instead on Microsoft's growing cloud profits and management's optimistic outlook for next quarter. The company forecast as much as $25.1 billion in sales over the next three months, thanks to what Hood described in today's conference call with investors as "healthy indicators of future growth."
