Amazon (AMZN, Financial)’s stock price moved down by more than 5% after the company forecast fourth quarter sales to fall in the $42 billion to $45.5 billion range, while the market’s expectation for the holiday season was $44.6 billion, near the top end of that range.
The third quarter earnings results were not a huge surprise by any means, as sales grew by 29%. Revenue grew across the board, led by Amazon Web Services, which recorded the sixth consecutive quarter of above 50% growth, followed by the international segment, which posted a year-over-year growth of 28.33%, and then North American retail, which came out with 25.78% year-over-year growth.
The forecast, however, was a bit of a surprise because the top end of the guidance - $45.5 billion - translates to a growth of 27%. That is against a fiscal record of 28% in the first quarter, 31% in the second quarter and close to 30% in the third quarter.
Amazon’s third quarter revenues were in line with expectations, but earnings per share of 52 cents was way short of analyst estimates of 79 cents per share. As if the earnings miss wasn’t enough, Amazon forecast an operating income of between $0 and $1.25 billion for the fourth quarter compared to the $1.1 billion the company posted last year. The company is planning to ramp up its investments, specifically in fulfillment centers and video content for Prime Video, which should understandably eat into their margins.
This quarter, as Amazon’s margins improved - especially in the North American retail segment - during the last several quarters, bottom line expectations have naturally been rising among investors.
But Amazon has always been a company that has focused on growth over profitability. How much cash flow it can generate has always been more important than how much of a profit it can turn for its investors. Amazon is not new to posting negative earnings, as it did in 2012 and 2014 when it made $61 billion and nearly $89 billion in sales.
Clearly, the market is not blind to the way the company operates, but the downward adjustment of stock price is indicative of the levels at which Amazon is trading right now. Amazon’s stock price has soared in the last 12 months. The stock’s 52-week range of $474.00 - $847.21 is a clear indication of how much the stock has risen in the last 12 months. According to Factset, Amazon’s current P/S ratio of 3.3 is much higher than its five-year average of 2.3.
As the valuation keeps moving north, even a small earnings shock can induce large movements in stock price, and the fourth quarter earnings forecast was more than enough to send it down by 4.2% at the time of writing the article. That is the bad news. The good news is Amazon is gearing up to spend a lot more on growth. When you think about it, that is bad news for the competition.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
