After two days of dramatic volatility in its stock, which saw the share price of Amazon first drop then soar by over $100, Jeff Bezos' online retailing titan was expected to report blow out earnings, and while it indeed reported EPS which smashed expectations, it missed on revenue while guiding well below consensus, in a mirror image of what it did last quarter.
In kneejerk response, the stock tumbled as much as 6%.
Here are the details from Amazon's just-concluded third quarter:
- EPS of $5.75, smashing estimates of $3.11
- Operating income of $3.72, also beating consensus estimates of$2.13 billion
- However, revenue of $56.576BN, missed the estimate $57.06 billion. Amazon in July forecast revenue of $54 billion to $57.5 billion
More importantly, Amazon guided Q4 net sales to be between $66.5 billion and $72.5 billion, which however was far below the consensus est. $73.78B. Meanwhile, operating income is expected to come in between $2.1 and $3.6 billion, compared with $2.1 billion in Q4 2017, and also well below the consensus estimate of $3.9 billion.
As a reminder, at the end of last quarter, Amazon did the exact same thing: beat on Earnings and Operating Income, while missing on revenue and guiding lower, yet the stock soared. Why the opposite reaction this time? Perhaps due to heightened concerns about "peak earnings" and with the company once again guiding well below consensus, even if it is due to sandbagging, the market is not happy and has sent the stock sharply lower after hours.
Looking at Amazon's most important segment, AWS, in Q3 it generated net sales of $6.68 billion, up from $6.11 billion last quarter, an increase of 46% Y/Y, if below the 49% growth rate last quarter but better than the 36% growth a year ago.
That said, despite the modest decline in annual growth, Bloomberg reminds us that a year ago, the consensus seemed to be that competition from Microsoft and Google would cut into AWS’s growth, but that has yet to happen. The division remains the leader in the rapidly growing cloud computing space, and a perhaps a leading candidate to secure the Department of Defense’s lucrative $10 billion Jedi contract.
On the bottom line, AWS was responsible for operating income of $2.1 billion, a 31.1% profit margin, up from the 25.6% margin a year ago. In other words, for yet another quarter, AWS was responsible for more than half, or 56% of Amazon's total operating income.
In addition to AWS, another bright spot was Amazon’s ad business. Ad sales, which represents the preponderance of a category that for now, Amazon calls “Other,” was up 123% this quarter to $2.5 billion. However, like AWS the pace of growth is slowing and in the second quarter, it was up 129%.
In his remarks in the press release, CEO Jeff Bezos indicated that he is focusing on Amazon Business, noting that the segment has reached a $10 billion annual sales run rate.
“And we’re not slowing down – Amazon Business is adding customers rapidly, including large educational institutions, local governments, and more than half of the Fortune 100. These organizations are choosing Amazon Business because it increases transparency into business spending and streamlines purchasing, with increased control. The team is doing a fantastic job building and innovating for customers”.
As noted above, the kneejerk reaction was negative, and the stock has plunged much as 6% after hours.
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