Amazon’s sales perked up in the third quarter, which is notable after a series of lackluster earnings. But the turnaround wasn’t enough to buoy shares in the face of a lower-than-expected forecast and disappointing growth in its cloud business.
Fueled by Prime Day in July, the e-tail giant racked up $127.1 billion for a year-over-year gain of 15 percent. While it didn’t quite reach the $127.5 billion analysts estimated, it posted a profit of 28 cents a share, beating the 22 cents a share expected.
The holiday, however, won’t be as merry as analysts hoped. Amazon anticipates net sales to land between $140 billion and $148 billion, for growth of between 2 and 8 percent year-over-year. This time last year, the company reported 9 percent year-over-year growth. The forecast disappointed analysts, who expected $155 billion.
Uncertainty over its projected operating income also stood out. In its announcement, Amazon said it would fall somewhere “between $0 and $4 billion.” In other words, the company floated the possibility of making $0 profit, just breaking even, and that sent a quake through Wall Street. Shares plunged more than 20 percent in after-hours trading.
The third quarter benefited from Amazon’s latest Prime Day in July, which was its biggest yet, according to the company. The fourth quarter should likewise see some sort of gains from its new Prime Early Access Sale in October. But apparently not enough.
The company places some of the blame for its down outlook on a challenging economic climate, a detail that’s not lost on the experts.
“Despite some better sales, [Amazon’s] bottom line remains under significant pressure. Operating income fell by 48 percent over the prior year, with net income down by 9 percent. Worryingly, operating income is not only lower than last year but has fallen below the third quarter level of both 2020 and 2019,” said Neil Saunders, managing director of GlobalData.
“The slide is apparent in the operating margin number, which has moved from 6.8 percent to 2 percent in just over a year. And with inflation still present, there is little relief in sight for the latter quarter of the year.”
Chief financial officer Brian Olsavsky clarified that Amazon is still “bullish” on the holidays, but was being conservative about its projections. Efficiency appears to be up, as he explained items come in stock at a higher rate and are delivered faster now than during the pandemic. Even so, it operates in a tough economic environment that will probably hammer sales.
“We are prepared for what could be a slower growth period, like most companies,” he said.
Chief executive officer Andy Jassy underscored Amazon’s value and convenience in “these uncertain economic times,” and stressed that the company is looking to cut operational costs in its fulfillment network, and it’s seeing “steady progress.”
Indeed, Amazon raced to bolster its warehouse capacity and air hubs as demand swelled early in the pandemic, but found itself saddled with operating a deeper and more expensive infrastructure while demand leveled off.
It’s also working through initiatives to “yield a stronger cost structure for the business moving forward,” he explained, adding that Amazon plans to “balance” and streamline its investments “without compromising our key long-term, strategic bets.”
Amazon’s fortunes don’t hinge on retail sales alone, however, and in the past, it often looked to the growth of its cloud business. But Amazon Web Services reported sales of $20.54 billion, missing analysts’ expectations of $21.2 billion. While that’s still growth of 27.5 percent year-over-year, it’s the lowest growth rate in eight years. Operating income of $5.4 billion also disappointed, missing the $6.37 billion expected.
“As the third quarter progressed, we saw moderating sales growth across many of our businesses, as well as increased foreign-currency headwinds,” continued Olsavsky, and those impacts will likely continue into the holiday quarter.
“As we have done at similar times in our history, we are also taking action to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere.”
Saunders believes Amazon is embarking on a new era.
“The realities of a much tougher market where demand is more muted and the costs of doing business remain elevated is taking its toll on the business…it underlines how much Amazon’s expensive operating model in retail is not yet optimized for a slower growth environment,” he said.
The company appears to be moving away from bold experiments, Saunders continued, and proceeding with more caution. “This shows up in decisions like shutting down underperforming divisions, including many of its physical stores. There is nothing wrong with this approach and it is actually a good thing for Amazon to be more disciplined about its performance. However, it arguably reflects an internal view that the operating environment has changed and that it is now much harder for Amazon to grow both sales and profits,” he added.