Amazon stock down over 18% on weak holiday revenue forecast

16 Inc. predicted Thursday that holiday sales and profit would come in well lower than analysts expected as cloud growth slowed and AWS profit missed expectations by nearly $1 billion, sending shares south in after-hours trading.

Amazon AMZN, -4.06% reported third-quarter profit of $2.87 billion, or 28 cents a share, down from 31 cents a share in the year-ago quarter after adjusting for Amazon’s 20-to-1 stock split. Revenue grew to $127.1 billion from $110.8 billion, in the middle of executives’ forecast for $125 billion to $130 billion but slightly missing analysts’ expectations; executives said revenue would have been $5 billion higher without the effects of the strengthening dollar.

Analysts on average expected earnings of 22 cents a share on sales of $127.39 billion, according to FactSet. Shares dove more than 20% at times in after-hours trading immediately following the release of the results, after closing with a 4.1% decline at $110.96. After-hours prices would take Amazon’s market capitalization lower than $1 trillion for the first time since March 2020, according to FactSet records.

“There is obviously a lot happening in the macroeconomic environment, and we’ll balance our investments to be more streamlined without compromising our key long-term, strategic bets,” Chief Executive Andy Jassy said in a statement. “What won’t change is our maniacal focus on the customer experience, and we feel confident that we’re ready to deliver a great experience for customers this holiday shopping season.”

Amazon had reported quarterly losses through the first half of the year, largely because of a rapid post-IPO decline in one of its investments, Rivian Automotive Inc. RIVN, +0.17%. But the Seattle-based company has also been looking to cut costs after spending wildly during the first two years of the COVID-19 pandemic to keep up with spiking demand for its online store and Amazon Web Services cloud-computing products.

Amazon’s stock has suffered as it faces comparisons to the headier days of last year, and will do so again in the holiday season, when it faces a comparison with a nearly $12 billion profit from its Rivian investment, which has declined more than 50% from its IPO price and stands at roughly one-fifth its peak post-IPO price. In Thursday’s report, Amazon guided for fourth-quarter operating profit of break-even to $4 billion and holiday sales of $140 billion to $148 billion, while analysts on average were expecting operating income of $5.05 billion on revenue of $155.09 billion, according to FactSet.

There were thoughts that Amazon would be cautious with its holiday forecast, as its attempts to cut costs run into the need to keep its giant logistics operation running smoothly. The company is looking to hire 150,000 workers to get through the holiday season, and recently announced increased pay for fulfillment workers.

“On 4Q consensus estimates, we believe AMZN will likely err on the side of being more conservative, given the uncertain consumer spend environment,” MKM Partners Managing Director Rohit Kulkarni wrote in a note. “We believe recently announced wage hike, higher near-term content costs amortization (NFL & Lord Of Rings), and potentially greater merchandise discounting might weigh on 4Q Op Margins.”

Amazon’s e-commerce operations were boosted in the third quarter by the company’s annual Prime Day event in July, and the company tried to replicate the event in October, but analysts saw the second Prime Day as less successful and potentially a sign of weakness.

“We see Amazon’s decision to hold two Prime Day sales in one calendar year as a red flag for weak e-commerce sales; consistent with retailers, in general, holding more sales when their sales are under pressure,” D.A. Davidson analyst Tom Forte wrote in a preview of Amazon’s report.

In the third quarter — with back-to-school sales and the first Prime Day event — quarterly retail sales in North America hit $78.84 billion, while overseas revenue totaled $27.72 billion. Analysts on average were expecting $77.24 billion and $29 billion respectively, according to FactSet. Sales in both locations were unprofitable from an operating perspective for the fourth consecutive quarter, losing a total of $2.88 billion.

Amazon’s profit largely comes from the fat margins of its AWS cloud-computing offering, but there have been concerns about growth leveling off for cloud after rival Microsoft Corp. MSFT, -1.98% reported a deceleration earlier this week and guided for a further decline in growth in the fourth quarter. Amazon reported AWS sales of $20.54 billion, up 27.5% from the year before and lower than analysts’ average estimate of $21.2 billion; operating income of $5.4 billion made up for e-commerce losses, but handily missed analysts’ average estimate of $6.37 billion, according to FactSet.

Opinion: The cloud boom is coming back to Earth, and that could be scary for tech stocks

“Elevated AWS concerns are centered around deals slowing down, competition (Oracle ORCL, +0.44% comments), & margins,” JP Morgan analysts wrote ahead of the report, while predicting 31% growth for AWS that did not come to pass.

Amazon’s other higher-margin business is advertising, which has grown strongly in recent years as companies seeking to sell products on Amazon pay the company to list their products higher when consumers search for them on the e-commerce platform. Amazon reported third-quarter advertising revenue of $9.55 billion, up from $7.61 billion a year ago and topping the average analysts estimate of $9.48 billion.

Amazon stock has declined 33.5% so far this year, as the S&P 500 index SPX, -0.61% has dropped 19.6%.

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