Amazon Plummets On Profit Drop, AWS Miss; Dismal Holiday Quarter Guidance

Amazon Plummets On Profit Drop, AWS Miss; Dismal Holiday Quarter Guidance

Two quarters ago, when Amazon reported otherwise respectable earnings, the market hammered the stock after AWS growth slowed and Amazon guided to the lowest revenue growth since 2001, despite broadly higher margins. Then, last quarter, Amazon stock tumbled again on the company’s disappointing profit outlook, and continued slowdown in the growth rate of the company’s golden goose – AWS.

And, as the company reported moments ago, as it has traditionally tended to do, its guidance of $66-70BN was a sandbagging as Amazon reported Q3 net sales of $70BN, at the very top of the range, and above the $68.7BN consensus estimate, however, this did not translate to an EPS beat as the company reported Q3 EPS of 4.23, well below the $4.59 expected.

Here is a summary of the Q3 highlights:

  • Q3 net sales of $69.981BN, beating expectations of $68.7BN
  • Q3 GAAP EPS of $4.23, missing expectations of $4.59
  • Q3 operating income $3.157BN, also missing expectations and the first quarterly decline in more than two years.
  • Q3 AWS Sales of $8.995BN, missing estimates of $9.19BN

While AMZN missed on most of Q3 metrics, the good news was that revenue did come in higher than sellside expectations, rising 23.7% in Q2, although looking ahead, there may be stormy clouds, even as profit declined for the first time in two years, as operating income shrank from $3.724BN to $3.157BN, the first drop in two years as the retailer spent heavily in its push to offer Prime customers one day shipping.

Yet while Q3 earnings were not terrible, the reason why AMZN stock is tumbling after hours is because of the company’s guidance for the all-important holiday quarter came in very weak, with the company expecting the top range for its Q4 sales below Wall Street’s estimate, in the process sparking worries that its big investments in next-day delivery aren’t bringing the sales boost investors were hoping for, to wit:

  • Q4 net sales estimate of $80-$86.5BN, far below Wall Street’s consensus estimate of $87.16 billion
  • Q4 operating income guidance between $1.2 billion and $2.9 billion, far below the Wall Street estimate of $4.31 billion, and also far below the $3.8BN in Q4 2018.

Taking the midline of Amazon’s Q4 revenue guidance of $83.25BN would indicate the slowest growth rate since Q4 2014.

And if the company’s top line guidance was ugly, its profit outlook was outright disastrous, as Amazon’s guidance for Q4 profit came in well below the lowest analyst expectation, with the company expecting to make just $1.2 billion and $2.9 billion in operating income, well below the Wall Street analyst estimate of $4.3 billion.

More bad news: after the company’s profit margin nearly doubled to an impressive 7.4% in Q1 2019, largely thanks to the increasing contribution from AWS, in Q2 and then again in Q3, profit slumped again, and the profit margin of 4.5% was the lowest going back to Q1 2018.

One reason for the profit slump: according to CNET, “Amazon’s next-day shipping ambitions are costing it a fortune” with Bloomberg adding that the company’s delivery expenses soared as did spending on new technology and content.  In short, Amazon’s flex to profits over growth is suddenly not looking that hot.

Indeed, while revenues may not be rising, costs and expenses sure are:

  • Operating expenses jumped 26%, the most in more than a year.
  • Worldwide shipping soared 46%, to $9.6 billion.
  • Technology and content, a bucket that includes salaries for employees in R&D as well as the infrastructure behind AWS, rose 28%, to $9.2 billion.

Soaring expenses and sliding profits aside, the other main reason – in addition to the dismal holiday quarter guidance – why the stock is plunging, is that Amazon Web Services, Amazon’s cloud computing division, also missing estimates for the second consecutive quarter, with Q3 AWS Sales of $8.995BN missing estimates of $9.19BN.

So, as Bloomberg notes, 2 key metrics – holiday quarter revenue forecast and third quarter revenue from its most profitable business – fell short.

There was more bad news: AWS generated only $2.26BN in operating income, a 25.14% operating margin, this was sharply lower from the 28.09% margin reported a year ago. Even so, AWS was responsible for 71% of the company’s total operating income of $3.16BN.

The last big surprise: North America segment margins tumbled to just 3% from 5.92% a year ago, as Amazon delivery expenses soared as did spending on new technology and content. In other words, “investors hoping for an immediate payday on the next-day delivery push will have to wait longer than they’d  hoped” as Bloomberg put it.

And here is another reason why Amazon expenses are soaring: its employees increased by 96,700 in one quarter to a record 750,000!

Of course, Jeff Bezos had some words of encouragement, saying that “Customers love the transition of Prime from two days to one day — they’ve already ordered billions of items with free one-day delivery this year. It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

Yes: customers may love the transition, but shareholders clearly do not, as one can see by the plunge in the stock.

In kneejerk response, the stock is tumbling more than 8% after hours, dropping as low as $1,623, back to levels last seen in March.

Developing

Tyler Durden
Thu, 10/24/2019 – 16:17