Amazon Falls Short On Earnings While Q4 Guidance Looks Disappointing, Shares Tumble

Oct 24
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Amazon released its third quarter financial results and the numbers came in slightly under expectations while the company issued poor forward guidance. As a result, its stock price dropped by as much as 9% in after-hours trading, and is currently down 7% at the time of writing.

  • EPS: $4.23 actual vs. $4.62 expected
  • Revenue: $70 billion actual vs. $68.7 billion expected
  • Amazon Web Services: $9 billion actual vs. $9.19 billion expected
  • Q4 Guidance: $80 to $86 billion vs. $87.4 billion expected

Amazon store sales up, but earnings suffer due to one-day shipping costs

Make no mistake, Amazon posted a huge gain, 24% to be exact, when it comes to revenue compared with a year ago. Despite that impressive growth operating income plummeted by a whopping 37%! Amazon made this nice and apparent on the slide below.

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The culprit? One-day shipping. Amazon originally budgeted $800M to upgrade its supply chain infastructure to faciliate one-day delivery for thousands of items, however it seems the company made a rare mis-step and underestimated this.  According to company statements, it may spend that amount again in the third and fourth quarter alone.

CEO Jeff Bezos isn't mincing words when it comes to the company's one-day shipping service. “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,” Bezos said. Its a big deal for the e-commerce giant.

If we forget about these one-time costs (not entirely one-time, since one-day shipping will require a bit higher operational cost per unit shipped moving forward), Amazon is doing Amazon things here, its net sales were $69 billion for the quarter, up from $56.5 billion a year ago.

If Q3 decided Amazon's ultimate fate, it would be in good shape. Revenue is up, while profits are down because of well-placed and well-timed investment, not much to see here. Meanwhile total operating income for all of Amazon's primary segments; North America, International, AWS fell to $3.2 billion versus last year's $3.7 billion.

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AWS slightly under the mark while Q4 Outlook is the real problem here

Amazon's Web Services came in just under analysts projections. AWS is the #1 cloud services platform in the world, and Bezos' cloud segment booked nearly $9 billion in revenue for the quarter - its highest ever. Compared to a year ago AWS increased its top line number by a whopping 35%.

Despite this, analysts were hoping for just slightly more at $9.1B. Microsoft's Azure posted a stunning 60% y-o-y growth, yet keep in mind Azure is much smaller to begin with.

Investors probably didn't have much of a problem with the numbers discussed above; where they took issue is Amazon's forward guidance, specifically the fourth quarter. Amazon is guiding down by billions of dollars for Q4 and many are left scratching their heads. If sales are up for the quarter, why is Q4 going to be so different?

According to the company's press release:

Net sales are expected to be between $80.0 billion and $86.5 billion, or to grow between 11% and 20% compared with fourth quarter 2018. Operating income is expected to be between $1.2 billion and $2.9 billion, compared with $3.8 billion in fourth quarter 2018.

It comes back to one-day shipping. “Significant investments tied to the rollout of one-day shipping will depress Q4 profits, we assume compounded by the shorter holiday shopping window,” said Baird Equity Research analyst Colin Sebastian.

Revenue increases of 11% to 20% compared to Q4 2018 would signal a major slowing of growth for Amazon and this is what's worried investors. So while one-day shipping affects the bottom line (profits), the top line (revenue) is looking less-than-stellar. Given that, we expect another miss on earnings for Q4 with both revenue and costs moving in the wrong directions.

 

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