Amazon Earnings Disappoint Investors

Amazon’s had an interesting year. The first six months of the year, Amazon opened three new warehouses worldwide. Between July 1 and today (Oct. 28), it opened an additional 23 — a decision that CFO Brian Olsavsky noted is increasingly necessary to making sure Amazon is ready for the big holiday rush. A decision he also noted is a “big undertaking.”

A big and expensive undertaking that bit hard into Amazon’s bottom line and caused the eTail giant to notch its lowest quarterly profit in a year — much to the disgruntlement of investors. Amazon’s share price plunged 6 percent during after-hours trading.

The results show “Amazon is still in investment mode, and The Street should not necessarily expect linear growth in profitability,” said Robert W. Baird & Co. Analyst Colin Sebastian.

Expect linear growth? Maybe not — but that stock price drop reflects a nervousness in just how Amazon plans to balance the value that it delivers its Prime customers, in particular, with the rising costs of serving them.

But Amazon is, as usual, focused on the big play and stands behind its results as a springboard for great things to come.

So, what were the highlights?

By The Numbers

All in all, Amazon’s earnings were $252 million in the third quarter, a notable step up from $79 million a year earlier. A solid-looking result — that adds up to about $0.52 cents a share, a big miss on the $0.79 cents a share that analysts surveyed by Thomson Reuters expected.

Sales were $32.7 billion — again a solid performance but one that was almost consumed entirely by operating expenses, which climbed 29 percent to $32.1 billion. Investments pushed Amazon’s operating margin down to 1.8 percent — a drop from Q2’s 4.2 percent.

AWS, Amazon’s internal ATM machine, saw sales jump 55 percent $3.23 billion. Chief Executive Jeff Bezos has said he expects AWS, which rents computing power to a variety of startups, government agencies and other corporations, to reach $10 billion in sales this year.

On the most positive figures side, Amazon slightly boosted its revenue guidance for Q4 to $45.5 billion from $42 billion. Analysts were looking for $44.6 billion, according to Thomson Reuters.

So Many Investments

The big bulk of Amazon’s revenue-eating expansions were in expanding its eCommerce and shipping capacity through its massive warehouse construction boom. That growth is at the hands of Amazon’s $99/year ($10.99/month) Prime program, which guarantees free, fast shipping on millions of items on its site and access to video content and other perks. As Prime membership grows, Amazon is focused on getting faster — like delivered-within-the-hour faster — and that ran up shipping costs 43 percent in the third quarter to $3.9 billion.

“We acknowledge that’s expensive,” Olsavsky said. But “customers love it.”

And Amazon is very focused on spreading the love — particularly when it comes to shipping — after a 2013 breakdown in the supply chains delayed orders and generally caused Amazon to look less than perfectly efficient in public.

“We want to control our own destiny,” Olsavsky said.

Amazon significantly increased its spending on promoting its video content. It is also building out teams for its Amazon Web Services cloud computing division, its Echo speaker device and its AI-fueled virtual assistant, Alexa, as well as investing in its operations in India. Amazon reported a loss of $541 million for its international segment, up from $208 million a year ago. On the conference call with analysts, Olsavsky attributed that to spending on expansion, especially in India.

“By far, the biggest individual thing [affecting margins] is the investment that we continue to make,” he added.

But Amazon — never afraid of a little loss (or some mildly put-off investors) — has spent the 20 years since its IPO swinging back between profiting and growing, since “get big, worry about profit later” is something like Amazon’s unofficial motto.

And Amazon did make a profit last quarter. The question will be whether the big investments will make for even more impressive ones next quarter.

We’ll keep you posted.