Amazon.com reported third-quarter profits and sales that surpassed Wall Street expectations on Thursday, driven by strong retail performance. Following the announcement, shares rose by 4% after hours, effectively offsetting earlier losses during regular trading.

These positive results may indicate a more favorable holiday season for retailers, who have been preparing for the slowest growth in holiday sales in six years.

Just three months prior, Amazon executives cautioned that consumers were being "cautious with their spending" and opting for more affordable alternatives.

The company is also facing increased competition from discount retailers like Shein and Temu, which offer a wide array of products at significantly lower prices, often sourced directly from China.

For the quarter ending September 30, Amazon reported a 7% increase in retail sales, reaching $61.41 billion.

"The most significant aspect of Amazon’s earnings was the unexpected improvement in margins," noted Gil Luria, head of technology research at D.A. Davidson. "Investors were worried about the retail sector's ability to sustain margins, yet Amazon managed to enhance them."

The operating margin for Amazon's international segment rose to 3.6% in the third quarter, up from 0.9% in the previous quarter, while the North America margin increased slightly to 5.9% from 5.6%.

Amazon Web Services (AWS), the company's cloud division, experienced a 19% rise in sales to $27.5 billion, aligning with estimates from LSEG data. This marks the fastest growth rate for AWS in seven quarters, contributing to one-fifth of Amazon's total sales but approximately two-thirds of its revenue.

"The downside here was AWS," commented Dave Wagner, portfolio manager at Aptus Capital Advisors, which holds Amazon stock. Although the 19% sales growth was above expectations, he suggested that the anticipated figure was closer to 21 or 22%.

AWS competes with Microsoft's Azure and Alphabet's Google Cloud, both of which reported increases in quarterly cloud revenue this week.

D.A. Davidson's Luria noted that Google Cloud has gained some market share from AWS over the last two quarters.

Conversely, Amazon has captured a portion of Google's advertising revenue, becoming increasingly favored by advertisers seeking access to a ready audience on its platform.

Amazon's advertising revenue increased by 19% to $14.3 billion, slightly surpassing expectations, aided by ad placements in physical store shopping carts and promotions on its Prime Video streaming service.

The midpoint of Amazon's revenue forecast for the fourth quarter is $185 billion, which falls short of the average analyst prediction of $186.16 billion. Luria indicated that the company is adopting a cautious stance regarding the holiday season due to significant variability.

Prior to the earnings announcement, Amazon's stock closed down 3.3%. However, the shares have appreciated nearly 23% this year, outperforming a nearly 20% rise in the overall market.

Based in Seattle, Amazon reported a 9% increase in sales within its North America segment, reaching $95.5 billion in the third quarter. Total revenue amounted to $158.9 billion, exceeding analysts' average estimate of $157.20 billion.

Net income rose to $15.3 billion, a 55% increase from $9.9 billion in 2023. Amazon's earnings per share were reported at $1.43, surpassing expectations of $1.14.

Additionally, Amazon has discontinued a practice that has been in place for at least 23 years, which involved holding a separate conference call with its chief financial officer and reporters, thereby reducing transparency.