A giant has stumbled: Amazon didn’t merely fall short of expectations. The retail and tech giant’s earnings dropped for the first time, year over year, since 2017. And the company projects yet another earnings fall over the holiday season.
Wall Street gasped, immediately sending the stock down about seven percent in after hours trading.
Analysts believed earnings per share would come in on average at $4.59 a share, but came in at $4.32 instead, for a profit of $2.1 billion. Revenue did better, with $69.98 billion topping the $68.8 billion expected.
The big drag on the numbers looks like Amazon’s push for free one-day delivery, for which the company plunked down more than $800 million expand the program to more items and markets in the last quarter. The retailer considers this a key initiative, and by the looks of it, it has no plan to stop investing in it.
“We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery,” Jeff Bezos, Amazon founder and chief executive officer said in a prepared statement.
The market might be hyperventilating, but the news doesn’t surprise anyone who has been paying attention to Amazon’s modus operandi. The company historically hasn’t feared losing money in the short-term, especially if it bolsters long-term business and expands its sprawling domain.
Bezos acknowledged as much, saying that it’s “a big investment,” and adding that “it’s the right long-term decision for customers.” He also made a play for environmental impact, explaining that faster deliveries generate less carbon emissions, due to the items shipping from local fulfillment centers.
Ultimately, what it means, as chief financial officer Brian Olsavsky said on the earnings call, is that the company’s push to establish one-day shipping will incur a $1.5 billion “penalty” over the year-ago quarter. Essentially, that covers transportation, which is the biggest expense and includes related issues like the increase of transportation capacity, adding poles and shifts in the warehouses, he explained.
“It’s a drastic change to the whole network topology that we’re glad to do and [we’re] working through it,” Olsavksy added. “We’ve been down this road before obviously at a number of different incarnations in Amazon’s history.”
Moody’s analysis of the results sums it up: “Amazon’s strategically-necessary investments in next-day delivery continued to weigh heavily on its retail profitability, with sales growth in North America of around $8 billion more than offset by a $10 billion increase in operating expenses, highlighted by shipping up $3 billion year-over-year,” said Moody’s Amazon analyst, Charlie O’Shea.
He noted that while the operating income — which ranges between $1.2 billion to $2.9 billion — won’t leave much room for retail profitability, the company has “significant runway” to account for this.
Notably, AWS — Amazon Web Services, the company’s cloud business — reported $9 billion in revenue, just shy of estimates of $9.1 billion. Its operating income came to $2.26 billion, up 9 percent year-over-year, but below FactSet’s consensus estimate of $2.55 billion. Considering AWS has practically bankrolled most of Amazon’s operating income, any signs of slowing growth could put a dent in future earnings.
Amazon’s projection for the holiday quarter further added to the angst. The guidance fell short of profit and sales estimates, with the company predicting $80 billion to $86.5 billion in net revenue and operating income of $1.2 billion to $2.9 billion. According to Factset, analysts expected operating profit to clock in at $4.19 billion on sales of $87.39 billion. Last year, Amazon reported operating income of $3.79 billion on revenue of $72.38 billion during the holiday quarter.
But this ramp-up doesn’t concern all analysts. Others, like Packaged Facts, believe that the company is on track for even more marketshare. The firm analyzed grocery, pet products and financial services categories, and noted that Amazon’s U.S. gross merchandise sales — which nabbed 28 percent of e-commerce sales in 2015 — is on track to pull in 43 percent this year.
“By 2022, we forecast that Amazon will contribute almost half of U.S. e-commerce sales,” said David Sprinkle, the firm’s research director.