Amazon’s underwhelming holiday projection hurts share price

Tim Maytom

Amazon’s share price fell around five per cent following its Q3 financial results despite record profits, with a conservative holiday forecast causing concerns among shareholders. Revenues were slightly below analyst projections, up 29 per cent year-on-year to $56.6bn (£44.1bn), but profits exceeded expectations, up to $2.9bn, or $5.75 per share.
That represents a huge jump compared to Q3 last year, when the firm brought in $256m in profits, and also marks the fourth consecutive quarter when the company, which passed the $1 trillion valuation mark this year, brought in more than $1bn in profits. That’s despite a 21 per cent rise in operating expenses, with investment in its Prime membership scheme, home delivery for Whole Foods and more original content for Amazon Prime Video the major contributors to rising costs.
The firm’s cloud services business, Amazon Web Services (AWS) continues to perform well, with revenues up 46 per cent year-on-year to nearly $6.7bn, but this was only just in line with analyst projections, suggesting growth for AWS may be slowing – another cause for investor concern.
“AWS now makes more money than Nokia and is approaching the revenue of Baidu,” said Darin Archer, CMO of eCommerce firm Elastic Path. “Businesses have to sell through Amazon and pay advertising dollars to get visibility, so this miss is nothing in their overall trajectory as they can pull mega ad spend budgets from big brands. Amazon’s B2B store is also at $10bn, so distributors out there should be thinking about how they’re going to up their game.”
The primary worry for shareholders, however, was the firm’s conservative predictions for this year’s holiday season, where the retail juggernaut is projecting just 10 to 20 per cent in year-on-year sales growth. This would represent a considerable slow down in growth at the most crucial time of the year.
Brian Olsavsky, Amazon’s chief financial officer, remained positive despite the mixed results, saying on the earnings call that the company was “expecting a strong holiday season, so there’s no message in our forward guidance against that…we have over 100m Prime eligible items that are available for free two-day shipping for Prime members. And again, when we’re talking about the unit deceleration, a lot of the fastest growing areas, things like subscription services, AWAS and advertising, are not caught in that metric.”
“Amazon, which ramped up its efforts to help marketers reach audiences in Q3, is becoming a bigger player in digital advertising, and we expect this to drive revenue growth moving forward,” said Aaron Goldman, chief marketing officer at 4C Insights. “Consumers hold long-established confidence in the eCommerce and video platform, and developments like the announcement of API integrations for Amazon Advertising with companies like 4C are now drawing more brands to the service, especially retail and CPG companies looking to scale and optimised Amazon investments or connect their eCommerce presence with a broader range of cross-channel advertising activities. It’s already become the new number three for digital ad revenue, and as advertising becomes a bigger focus, we expect it to drive future financial performance.”