Amazon stock jumps 5% on $38B deal with OpenAI

Just one day after rising 10% after reporting robust third quarter earnings, Amazon (NASDAQ:AMZN) stock was on the move again, this time with a different catalyst fueling its rise.

Amazon stock increased another 5% on Monday after it inked a deal with OpenAI, the leader in generative AI and the developer of ChatGPT.

Specifically, the deal was between OpenAI and Amazon Web Services, the company’s cloud computing business.

Through this new $38 billion seven-year partnership, OpenAI is paying to use AWS’s infrastructure to run its core artificial intelligence (AI) workloads starting immediately. The core AI workloads mainly include training its models and running its products, like ChatGPT for millions of users. AWS’s infrastructure has the capacity to run hundreds of thousands of Nvidia GPU chips, with the ability to expand to handle agentic workloads.  

“Scaling frontier AI requires massive, reliable compute,” OpenAI co-founder and CEO Sam Altman said. “Our partnership with AWS strengthens the broad compute ecosystem that will power this next era and bring advanced AI to everyone.”

In short, this deal combines AWS’s leadership in cloud computing infrastructure with OpenAI’s advancements in generative AI to support the growing use of ChatGPT and the rising demand for computing power.

“As OpenAI continues to push the boundaries of what’s possible, AWS’s best-in-class infrastructure will serve as a backbone for their AI ambitions,” Matt Garman, CEO of AWS, said. “The breadth and immediate availability of optimized compute demonstrates why AWS is uniquely positioned to support OpenAI’s vast AI workloads.”

Analyst boosts price target

The $38 billion over 7 years would add some $5.5 billion in revenue per year for Amazon. In the third quarter, AWS generated $33 billion in revenue, so AWS would make $132 billion in revenue annually – four times $33 billion. The $5.5 billion in OpenAI revenue would be about a 4% boost.

Considering that AWS is a high margin business, with a roughly 35% operating margin, that would come out to about $1.9 billion in additional earnings per year – or roughly 4% of run rate earnings.

Initially, Microsoft was the exclusive cloud provider for OpenAI. Now that AWS is also a partner, it not only drives revenue; it mitigates what was a huge advantage for Microsoft, which is AWS’s chief cloud rival.

Wall Street analysts are bullish on the deal, with analysts at BofA calling it “important validation for AWS” as it positions them to meet and support varying AI demand, according to the Fly. Evercore said it provides “material upside” for Amazon, while Wedbush boosted its price target to $340 per share.

Amazon stock is currently trading at $254 per share. The stock is up about 14% over the past two business days and has gained about 16% YTD. It currently has a median price target of $290 per share, suggesting 14% upside. It is trading at about 28 times forward earnings.