Commentary

Amazon Turns A Record Profit, But Wall Street Frets About Its Outlook

Remember when everyone was wondering when Amazon would turn a profit? Well, despite the online-and-everywhere-else retailer reporting record net income of $2.88 billion yesterday -- the fourth straight quarter its profits have exceeded $1 billion -- its stock tailspinned about 9% in after-hours trading. 

Investors are spooked by “its slowing e-commerce growth and disappointing holiday-quarter profit and sales outlook,” Andria Cheng writes for Forbes.

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“That worry was evident on a conference call that Amazon hosted with analysts Thursday night,” Cheng continues. “Several questions centered on what led to its slowing growth both in the U.S. and overseas, the financial impact of its recent move to raise its U.S. minimum wage to $15 an hour, and its ‘omnichannel’ plans at a time when Walmart, Target and other brick-and-mortar retailers are doubling down on their e-commerce spending and capitalizing on their physical store fleets -- many of which are much bigger than Amazon's Whole Foods -- for curbside online grocery pickup and other services to attract shoppers.”

Seeking Alpha has a full transcript of that call, with director of investor relations Dave Fildes and CFO Brian T. Olsavsky representing Amazon. 

“Olsavsky said that fourth-quarter revenue would be affected by currency-exchange rates, a tougher comparison as it reaches a year since the Whole Foods Market acquisition, and the fact that Prime subscription revenue used to be accounted for in only the fourth quarter but is now spread throughout the year,” Jeremy C. Owens writes for MarketWatch.

“Amazon’s more subdued expectations for this year’s holiday shopping season, which runs from the U.S. Thanksgiving holiday in late November through New Year’s, was a particular surprise. It forecast that fourth-quarter sales will rise between 10% and 20%, or up to $72.5 billion, while analysts were expecting $73.9 billion, according to Refinitiv data,” write Reuters’ Jeffrey Dastin and Arjun Panchadar.

“That would be Amazon’s lowest quarterly sales growth since at least the start of 2016. In the last four quarters, sales increased between 29% and 43%,” they add.

Looking back at the third quarter, “sales were up 29% to $56.6 billion, below what analysts had predicted. In Amazon’s biggest business, its online store, sales rose just 11% over the past year. A year ago, the pace was twice as quick,” points out Karen Weise for the New York Times.

“They are saturating the core market in the U.S. for e-commerce,” Cooper Smith, who leads Amazon research for Gartner L2, tells Weise. “'This is a company in transition right now,' moving from a focus on acquiring more customers to getting more growth from people who already shop the site.”

The results highlight “the growth of Amazon’s high-margin businesses, like its cloud and advertising units, that are more profitable than its core retail segment,” writes CNBC’s Eugene Kim.

“A September report from eMarketer estimated that Amazon is now the number three digital-ad seller in the country, behind Facebook and Google. Brands will spend $4.61 billion advertising on the Amazon platform this year, the report estimated. Mike Olson, an analyst with PiperJaffray, anticipates that Amazon advertising revenue will reach $8 billion this year, a number that will double to $16 billion by 2020, and that will soon overtake in profitability Amazon’s big moneymaker, Amazon Web Services, which sells cloud-computing services,” Alana Semuels reports for The Atlantic.

But AWS is doing just fine. 

“For a long time now, much of the reason to be optimistic about Amazon was its lucrative cloud-computing division -- and that business looks plenty healthy. While sales growth slowed, operating income at the Amazon Web Services unit soared 75% over a year earlier,” writes Sarah Halzack for Bloomberg Opinion.

“AWS now makes more money than Nokia and is approaching the revenue of Baidu,” observes Darin Archer, CMO at e-commerce provider Elastic Path, in an email. “Businesses have to sell through Amazon and pay advertising dollars to get visibility, so this miss is nothing in their overall trajectory as they can pull mega ad spend budgets from big brands. Amazon’s B2B store is also at $10B with a B, so distributors out there should be thinking about how they're going to up their game.” 

Google parent Alphabet, meanwhile, also missed analysts’ estimates but its “revenue rose 21% year-over-year, with its advertising business accounting for $28.95 billion of the total $33.7 billion generated in the third quarter -- up 18.44% year-over-year,” MediaPost’s Laurie Sullivan reports for SearchMarketing Daily.

Mad men adrift,” indeed.

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