Amazon.com (AMZN) reported third-quarter 2022 earnings of 28 cents per share, declining 9.7% year over year.

AMZN’s net income, totaling $2.9 billion, is inclusive of a pretax valuation gain of $1.1 billion in the non-operating income associated with its investment in Rivian Automotive.

The adjusted bottom-line figure stands at earnings of 20 cents per share, missing the Zacks Consensus Estimate by 9.1%.

Net sales of $127.1 billion rose 15% year over year. The figure was within management’s guided range of $125-$130 billion. However, the metric lagged the Zacks Consensus Estimate of $127.7 billion.

Amazon witnessed a $5-billion impact of unfavorable fluctuations in foreign exchange rates, without which year-over-year net sales growth would be 19%.

Nevertheless, AMZN experienced year over year growth of 7% in its online stores’ sales, which stood at $53.5 billion in the reported quarter.

Physical stores’ sales grew 10% year over year to 4.7 billion in the third quarter.

Strength in Prime was a positive. Amazon witnessed 9% growth in its subscription services sales, which were $8.9 billion in the reported quarter.

Strengthening relationships with third-party sellers remained a positive. In the reported quarter, sales generated by third-party seller services rose 18% on a year-over-year basis to $28.7 billion.

Additionally, sales from robust advertising services increased 25% to $9.5 billion.

Coming to segmental details, North America revenues (62% of sales) rose 20% from the year-ago quarter’s level to $78.8 billion. International revenues (22% of sales) declined 5% year over year to $27.7 billion. Amazon Web Services’ (AWS) revenues (16% of sales) rose 27% year over year to $20.5 billion.

Amazon expects inflationary pressure, global supply-chain constraints, geopolitical tensions and unfavorable foreign currency fluctuations to continue affecting its performance in the fourth quarter.

AMZN has lost 40.3% on a year-to-date basis compared with the industry’s decline of 37.2%.

Moreover, shares of Amazon fell 13% in pre-market trading due to its lower-than-expected guidance for holiday sales.

Nevertheless, Amazon’s strong global presence, growing Prime momentum, strengthening AWS portfolio, improving Alexa skills, an expanding smart devices portfolio and growing efforts toward gaining strong traction among small and medium businesses are likely to drive its near-term financial performance.

Amazon.com, Inc. Price, Consensus and EPS Surprise

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Amazon.com, Inc. price-consensus-eps-surprise-chart | Amazon.com, Inc. Quote

Prime & Retail Efforts

Amazon witnessed a huge success at its mega shopping event of Prime Day on the back of its strong relationships with third-party sellers. This remained a major positive

Amazon continued to make strong efforts to bolster its Prime program and the retail business.

The growing momentum of AMZN’s Just Walk Out technology and Amazon One remained noteworthy. The implementation of both technologies at Amazon stores, third-party retail stores, airports and stadiums continued to drive its customer momentum.

This apart, Amazon teamed up with new brands and retailers, such as GNC, PacSun, SuperDry, Sur La Table and 100% Pure to enable Prime members in or around Atlanta, Chicago, Dallas, Las Vegas, Miami, Phoenix, Scottsdale, Seattle and Washington D.C. to avail same-day delivery facility of their purchases from these brands.

Amazon’s increasing number of fulfillment centers globally, especially in the United States, Mexico, Canada, Ireland and Turkey, continued to aid the performance of its retail business.

In addition, the expanding original content and the overall content portfolio on Prime Video continued to accelerate Prime engagement. The rising number of local originals across the world remained another major positive.

Prime Video streamed The Lord of the Rings: The Rings of Power in the third quarter, which turned out to be a mega hit. It has a viewer base of above 100 million to date. Further, there were more than 25 million viewers.

It streamed original series titled Making the Cut and The Outlaws.

Expanding AWS: A Key Driver

AWS, which witnessed strong top-line growth, continued to gain customer momentum in the third quarter, courtesy of its highly reliable services portfolio and the increasing number of data centers, availability zones and regions.

In the third quarter, Amazon announced the general availability of AWS IoT FleetWise.
 
Further, AWS experienced addition of Pick n Pay to its clientele. AWS was selected by Pick n Pay as the latter’s strategic cloud provider.

Robust Smart Devices Portfolio

Amazon’s strengthening portfolio of Fire TV devices and Kindle devices was beneficial.

Improving the skills and features of Alexa helped AMZN gain customer momentum.

Expanding Blink Video Doorbell and Ring product offerings remained noteworthy.

Quarter in Detail

Product sales (46.7% of sales) increased 8.1% year over year to $59.3 billion. Service sales (53.3% of sales) rose 21.1% from the year-ago quarter’s level to $67.8 billion.

Operating expenses were $124.6 billion, up 17.6% from the year-ago quarter’s level. As a percentage of revenues, the figure expanded 241 basis points (bps) on a year-over-year basis to 98%.

Cost of sales, fulfillment, technology and content, marketing, and general and administrative expenses increased 11.7%, 11.3%, 35.5%, 37.5% and 42.2% to $70.3 billion, $20.6 billion, $19.5 billion, $11.01 billion and $3.1 billion, respectively, on a year-over-year basis.

Other operating expenses were $165 million in the reported quarter against $11 million of income in the year-ago quarter.

Overall operating income decreased 48% from the year-ago quarter’s level to $2.5 billion. The operating margin contracted 240 bps from the year-ago quarter’s level to 2%.

Operating income for AWS was $5.4 billion, up 10.6% year over year.

The North America segment reported an operating loss of $412 million against the operating income of $880 million in the prior-year quarter. Also, the International segment reported an operating loss of $2.5 billion, up from the loss of $911 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Sep 30, 2022, cash and cash equivalents were $34.9 billion, down from $37.5 billion as of Jun 30, 2022. Marketable securities totaled $23.7 billion at the end of the third quarter, up from $23.2 billion at the end of the second quarter.

Long-term debt was $58.9 billion in the reported quarter, up from $58.1 billion in the previous quarter.

In the third quarter, AMZN generated $11.4 billion of cash from operations, up from $8.9 billion in the second quarter.

On a trailing 12-month basis, free cash flow was an outflow of $19.7 billion compared with $23.5 billion in the prior quarter.

Guidance

For fourth-quarter 2022, Amazon expects net sales between $140 billion and $148 billion. Net sales are expected to grow 2-8% from the year-ago quarter’s reported figure. The Zacks Consensus Estimate for net sales is pegged at $156.3 billion.

Management projects an unfavorable foreign exchange impact of 460 bps.

Operating income is anticipated between $0 and $4 billion.

Zacks Rank & Stocks to Consider

Currently, Amazon carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the retail-wholesale sector are Ross Stores (ROST) , Arhaus (ARHS) and The Kroger (KR) , all three currently carry a Zacks Rank #2 (Buy).

Ross Stores has lost 16.5% on a year-to-date basis. The long-term earnings growth rate for the ROST stock is currently projected at 10.5%.

Arhaus has lost 36.5% on a year-to-date basis. The long-term earnings growth rate for the ARHS stock is currently projected at 14.3%.

Kroger has gained 1.7% on a year-to-date basis. The long-term earnings growth rate for the KR stock is currently projected at 11.67%.

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