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SII - FANGS & NOSH
10-25-18 - "Amazon Plunges After Missing On Revenue, Poor Guidance"
After two days of dramatic volatility in its stock, which saw the share price of Amazon first drop then soar by over $100, Jeff Bezos' online retailing titan was expected to report blow out earnings, and while it indeed reported EPS which smashed expectations, it missed on revenue while guiding well below consensus, in a carbon copy of what it did last quarter.
In knee-jerk response, the stock tumbled more than 6%.
Here are the details from Amazon's just concluded third quarter:
- EPS of $5.75, smashing estimates of $3.11
- Operating income of $3.72 billion, also beating consensus estimates of $2.13 billion
- However, revenue of $56.576BN, missed the estimate $57.06 billion. Amazon in July forecast revenue of $54 billion to $57.5 billion
More importantly, Amazon guided Q4 net sales to be between $66.5 billion and $72.5 billion, which however was far below the consensus est. $73.78B. Meanwhile, operating income is expected to come in between $2.1 and $3.6 billion, compared with $2.1 billion in Q4 2017, and also well below the consensus estimate of $3.9 billion.
This will be the key question facing shareholders: why the drop in margins in what is traditionally Amazon's most lucrative quarter?
Here a quick reminder that at the end of last quarter, Amazon did the exact same thing: beat on Earnings and Operating Income, while missing on revenue and guiding lower, yet the stock soared. Why the opposite reaction this time? The answer is likely due to heightened investor concerns about "peak earnings" and with the company once again guiding well below consensus, even if it is due to sandbagging, the market is not happy.
Indeed, as RJ Hottovy, analyst at Morningstar writes, investors are worried about the weak profit outlook for the busy holiday quarter and why Amazon expects spending to increase. Specifically, analysts will want clarity on whether it's a result of one-time costs like investing in a second headquarters or ongoing expenses like giving warehouse workers raises and opening new Amazon Go stores.
"It all comes down to not knowing why they expect to have heavier spending in their busiest quarter," he said.
Going back to the historical data, and looking at Amazon's most important segment, Amazon Web Services, or AWS, in Q3 it generated net sales of $6.68 billion, up from $6.11 billion last quarter, an increase of 46% Y/Y, if below the 49% growth rate last quarter but better than the 36% growth a year ago. Here is the historical growth rate of AWS:
In his remarks in the press release, CEO Jeff Bezos indicated that he is focusing on Amazon Business, noting that the segment has reached a $10 billion annual sales run rate.
For those still concerned about AMZN's cash burn, the company reported LTM Free Cash Flow in Q2 of just over $15.4 billion, a new all time high.