With the bulk of the FAAMG stocks - which is now GAMMA following Facebook's rebranding to Meta - reporting solid results, investors were keenly looking to Amazon earnings, where the biggest question for Amazon is how sustainable are the growth trends that boosted its performance during the pandemic. The Internet giant was one of the biggest beneficiaries of shifts in consumer and business behavior last year while continuing to grab market share in cloud.
Many consumers flocked to buy things online as they wanted to avoid infection at physical stores, with the recent Delta wave scare likely providing a further boost to Amazon. Further, Amazon Web Services revenue soared on back of rising usage from Internet digital services - including remote-working software, videostreaming and gaming. But with the wider availability of vaccines and as employees start to return to physical offices, the risk is some of these trends may start to reverse. Investors will be also looking for any commentary on the future prospects for regulation and antitrust legislation.
That said, Amazon is lapping last year’s blockbuster pandemic boost, and investors are aware it can’t match last year’s growth. Analyst estimate third-quarter sales growth of 16.3% to $112 billion - the high end of the company's own guidance for Q3 of $106-$112BN - less than half the pace of growth of the same period a year ago. While slowing growth is anticipated, 16.3% for a company the size of Amazon is still remarkable.
A forward-looking question for today: How is Amazon’s profitability going to shake out after the company added millions of customers, hundreds of warehouses, and hundreds of thousands of employees in the past year?
Looking ahead, another key focus will be on how expensive the busy holiday quarter will be due to broken supply chains, shipping logjams and inventory shortages. As Bloomberg notes, Amazon is not afraid to spend big and sacrifice profits to stand out from competitors and this holiday season could be a moment to shine if everything around them is struggling. Profit is secondary to customer experience. In other words, watch the operating-income forecast for the fourth quarter for an indication of big spending plans.
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So with that in mind, how did Amazon do in Andy Jassy's second quarter as the company's new CEO? Not good: not only did the company miss on the top and bottom line and operating income, but guided much lower than Wall Street expected:
- Net Sales $110.8BN, up +15.3 Y/Y but missing estimates of $111.81B
- EPS $6.12, down big from $12.37Y/Y and also missing estimates of $8.96
- Operating Income $4.85BN, down 22%Y/Y missing est. $5.62B
- AWS net sales $16.11 billion, up 39% and beating estimate $15.40 billion
- Online stores net sales $49.94 billion, up 3.3% and missing estimates of $51.53 billion
Looking ahead, the company's guidance was unexpectedly ugly, with the high end of expectations missing sellside consensus as the company sees several billion dollars in additional costs in 4Q.
- Q4 Net Sales $130.0BN to $140BN, missing Wall Street est. $141.62B
- Q4 Operating income between $0 billion and $3.0 billion, also badly missing estimates of $7.44BN
Amazon's dismal forecast signaled that the pandemic’s boost to online shopping continues to fade. The company’s revenue and profit also missed projections for the third quarter and Amazon said its costs to negotiate supply chain issues and add employees to deliver goods in the holiday season would cut further into profit.
Commenting on the quarter, Andy Jassy said that "in the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners"
Digging into the numbers we find that the company's revenue grew by 15.3% in Q3, less than half the 37.3% from a year ago. it gets worse because the Q4 midline revenue guidance of $135BN is projected to grow just 7.5% Y/Y, the slowest growth in the past decade.
A breakdown of sales in Q3 between domestic and international shows misses in both:
- North America Net Sales $65.56B, missing est. $66.36B
- Intl Net Sales $29.15B, missing est $29.42B
There was more bad news: operating margins tumbled, dropping from 6.8% in Q2, to just 4.4%, tied for the lowest since March 2018.
A look at margins showed more ugliness with a big drop in both North American and Intl retail margins, which actually turned negative again after three quarter in the green, and it was the AWS margin of just over 30% that saved the company's overall profit margin. And perhaps most remakrably, if it weren't for AWS's $4.883BN in profit, AMZN would have a negative profit margin across its legacy operations.
As Bloomberg notes, there was lots to chew on in Amazon’s expenses rundown, which shows costs are rising, if not by as much as CEO Andy Jassy’s dire warning on 4Q expenses. Fulfillment costs were up 26%, technology and content (largely engineering salaries) climbed 31%. Marketing expense surged by almost 50%. That said, all of those are in line with recent increases.
As usual, the saving grace for Amazon was AWS, where sales picked up materially, rising 39% Y/Y to $16.11BN, better than the $15.40BN expected, better than the 37% increase in Q3 and the highest revenue growth rate since Q1 2019!
Looking ahead, there was a big warning from Amazon that deliveries in the fourth quarter will be expensive. They want to get through the holidays however they can and money is no object. They’re planning to drop a ton of money in holiday quarter. But investors are looking at that holiday outlook, and cloud computing isn’t diverting their attention.
Despite the ugly results, the company continued its hiring ways and after a small dip in Q1, the company employees hit a new record high of 1.468 million.
The bottom line, and sadly for the bulls, Amazon tempered any enthusiasm about a repeat of last year’s blockbuster holiday quarter. A sales forecast of $130 billion to $140 billion and an operating income forecast of up to $3 billion were both shy of expectations.
The income outlook is likely the most sobering number as it suggests Amazon expects it will be expensive to get customers’ orders to them in time given global shipping logjams, inventory shortages and a labor crunch that is driving up payroll costs. Long-time Amazon watchers shouldn’t be surprised, though. Amazon doesn’t like to say no to customers.
In kneejerk response, the stock is tumbling after hours, sliding more than 4%.