Yahoo Finance Amazon.com (AMZN) Stock Plunges on Q3 Earnings, Q4 Guidance Misses
Amazon.com (ticker: AMZN) whiffed on earnings and posted in-line revenue on Thursday, causing a sharp selloff in AMZN stock. It wasn't just the earnings miss that sent shares lower, it was soft fourth-quarter revenue guidance that spooked investors. Amazon shares fell more than 6 percent in after-hours trading.
Earnings came in at 52 cents per share in the third quarter, more than triple the 17 cents per share it earned in the same quarter a year ago. Still, that was far less than the 78 cents per share analysts were looking for. Revenue jumped 29 percent to clock in at $32.7 billion last quarter, but that was merely in line with the $32.69 billion forecast.
Guidance, however, might have been the most disappointing part of the report. While Wall Street expects Amazon to haul in $44.58 billion in the holiday quarter, Amazon guided for between $42 billion and $45.5 billion, implying a midpoint of $43.75 billion.
These weaker-than-expected third-quarter results stand in stark contrast to Amazon's blowout second quarter report in July, when the company beat on all three major metrics: EPS, revenue, and guidance.
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Amazon Web Services, the high-growth, high-margin cloud computing arm of AMZN that's been largely responsible for the company's consistent profitability over the past year, still saw revenue soar 55 percent last quarter, but it wasn't quite enough to deliver an earnings beat.
Another bright spot was Amazon Prime Day, the company's annual sales holiday in July for Amazon Prime members, was a huge success and the biggest single day of sales for Amazon ever. Orders grew by more than 60 percent globally.
In some ways the earnings selloff is long overdue: AMZN stock has followed up a stellar 2015 with another great run in 2016. The stock was up 21 percent for the year going into Thursday's earnings report. Don't be surprised if shares fall even lower in the coming weeks before they can test all-time-highs again.
Before its third-quarter results came out, analysts had an average "buy" rating on AMZN stock, giving shares a $920 price target, or roughly a 12 percent premium to Thursday's closing price around $818. With shares falling below $780 in late afternoon trading, that consensus price target is also likely to come back down to earth.
On the brighter side. AWS, the high-margin engine behind Amazon's meteoric growth, should continue to be a perfect cash cow for AMZN. AWS operating income accounted for more than 100 percent of the entire company's operating income last quarter, since Amazon operated at a loss internationally. AWS showed a $861 million operating profit last quarter, while the entire company's operating profit came to just $575 million.
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Amazon would be a completely different business without a sugar daddy like AWS. The company routinely sacrifices margins in its retail business to offer the lowest prices, fastest delivery, and best customer service. Fulfillment expenses jumped 34 percent to $4.3 billion in the third quarter, increasing at a higher rate than revenue's 29 percent uptick.
"Operating losses internationally reflect continued investment that should pay off down the line," says Jason Moser, senior analyst for the Motley Fool's Million Dollar Portfolio. "And while AWS growth may be slowing down as the market remains competitive, the boost in operating margin certainly points toward the profitable nature of that business."
AMZN also frequently enters new industries not directly related to its core business, which can pay off big in the long-run but can also cost a fortune to get started or fail altogether.
AWS is easily the industry leader in cloud computing, with Microsoft Corp.'s ( MSFT) Azure coming in a distant second place. Still, major tech companies like Interational Business Machines ( IBM) and Alphabet ( GOOG, GOOGL) are throwing billions at the area in desperate bids to catch up, so Amazon can't just rest on its laurels. But for the time being, Amazon's head start is serving it well.
Devices and Alexa. Amazon-made devices have begun to fly off the shelves in recent years, and that appears to have been the case again in the third quarter. Jeff Bezos, Amazon's founder and CEO, heaped praise on Alexa specifically: "Alexa may be Amazon's most loved invention yet -- literally -- with over 250,000 marriage proposals from customers and counting."
The mass proliferation of Alexa, Amazon's voice-activated, AI-powered virtual assistant, is a very bullish sign for shareholders, who could be seeing the emergence of a technology that changes how we interact with gadgets and the internet.
With competitors like Apple's ( AAPL) Siri and Google Assistant, it's important to capture market share early -- you never know just how pervasive they could become.
[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]
It certainly would've been a mistake to discount Amazon, an upstart online bookseller, back in the mid-1990s. After 20 incredibly successful years, why start today, after one off quarter?
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