Amazon (AMZN) hit a five-month low this morning after the company
missed revenue estimates and offered weak sales guidance for the second quarter
in a row.
Amazon handily beat third quarter earnings estimates but the company's profit forecast for the fourth quarter came in below estimates, breaking a two-quarter streak of issuing upside earnings guidance.
Third quarter sales grew 29% to $56.6 bln, which was towards the high end of its $54-57.5 bln forecast, but missed sell-side estimates by 0.8%. Weakness came from the international segment, due to the strong dollar and tough comparisons from lapping the Souq acquisition and a shift in the Diwali holiday into the fourth quarter.
Meanwhile, operating income grew 973% to $3.7 bln, which was well above $1.4-2.4 bln guidance.
While the company's market leading cloud-computing business Amazon Web Services' (AWS) growth slowed a bit sequentially, margins were better than expected, expanding 560 basis points to 31.1%. AWS profit accounted for 56% of the company's third quarter operating income versus 337% of profit one year ago, meaning AWS is no longer subsidizing the rest of the company. What's more, the high-margin advertising business still represents a large opportunity and grew 123% to $2.5 bln.
However, guidance for the holiday quarter has caused some consternation. Amazon called for fourth quarter revenue growth to slow to 10-20% to $66.5-72.5 bln, almost 6% below consensus at the midpoint. Amazon tends to guide conservatively, so consensus is still near the high end of the company's wide forecast.
Retailers have been forced to beef up their online efforts as Amazon has taken significant market share in the retail sector. Amazon reportedly accounts for nearly half of eCommerce sales in the US and 5% of all retail sales.
Fourth quarter operating income of $2.1-3.6 bln was 27% below consensus, but the company tends to surpass its profit guidance so the company may very well report profit above the consensus from yesterday, which was neatly $4 bln. The company's increase to a $15 hourly wage for all employees weighed on the bottom line, but the company did not quantify that impact.
The Amazon investment case is becoming more about profits than revenue growth, which is a good thing. The transition from growth to value can be a difficult one for investors (Apple stock lost nearly 50% of its value between late 2012 and early 2013 as it became apparent that profits would fall 2013).
However, Amazon is still reporting very enviable growth on the top and bottom line. The outlook is promising as the company has a dominant market position in strong secular growth businesses (eCommerce and cloud computing) that are generating more recurring, high-margin services revenue. While the stock may appear expensive with an $810 bln market value at 64x next year's earnings, it trades at less than 20x free cash flow per share estimates for next year.
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