Amazon (AMZN, Financial), a U.S.-based global leader in e-commerce and cloud computing, was a top detractor for the period. Amazon’s share price fell following its third-quarter earnings report and disappointing fourth-quarter outlook. Management indicated that fourth-quarter revenue will range between $140 billion-148 billion, which is a 5% year-over-year increase (10% increase in constant currency) and 6% below consensus estimates. This deceleration compares to 15% growth in the third quarter. Management attributed weaker third-quarter sales to inflation and its impact on retail consumers’ budgets. We believe this is a macro issue, rather than company specific, since Amazon gained market share during the quarter. Retail profitability for the third quarter was also disappointing at -$2.9 billion, and earnings guidance was only slightly better for next quarter. In response, the company is cutting its retail capital expenditures and implementing various changes to improve margins. However, these changes will likely not generate benefits for some time because cost efficiencies are hard to implement during the holiday season and the company does not want to sacrifice customer services to rush profitability measures. Amazon Web Services (AWS) revenue was up 28% year-over-year and 3% below consensus estimates due to reduced or optimized usage. AWS’ margins were also below consensus and declined 400 basis points year-over-year as the company absorbed operating leverage for customers. While management indicated that AWS’ margins will “fluctuate over time,” the company continues to invest in the business, and its backlog grew 57% year-over-year. Although results and guidance during the quarter were mixed, we remain confident in our investment over the long term because we believe that Amazon’s business drivers are healthy and that its lower guidance is mostly the product of macro issues and timing.
From David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Global Select Fund fourth-quarter 2022 commentary.
