Record profit wasn’t enough to pacify Amazon investors last week
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Record profit wasn’t enough to pacify Amazon investors last week

Last week, ecommerce titan Amazon reported third-quarter earnings that included a record profit figure – but the company’s share price went down. Despite vastly outperforming the Street’s expectations on earnings, the company logged a narrow miss on revenue and supplied investors with an unusually cautious guidance figure for the all-important fourth quarter. Usually, the end of the year is when Amazon investors get really excited – holiday season has always been a winner for the company – but this year, expectations seem to be muted.

Even after a sell-off, Amazon shares are up 41% year to date

graph 3010 amazon

Source: Yahoo Finance

Investors sent the share price down significantly after earnings were released – to the extent that Amazon has been knocked off its ‘second most valuable company in the world’ perch (number one remains Apple, and the number two spot now belongs to Microsoft, which has just made a record investment in cloud services to try and challenge Amazon’s fastest-growth division). But do the results reported really justify this kind of major move?

It’s hard to justify investors’ sudden dislike of Amazon with a sober look at the figures. When it comes to sales, Amazon just missed analysts’ expectations: the company reported revenues of $56.6 billion from the quarter, while Wall Street was looking for $57.1 billion. It’s worth noting, however, that Amazon’s ‘miss’ on revenues still amounts to a 29.7% year on year rise. When it came to profit, however, Amazon cleaned up: the company reported a record $2.9 billion for the third quarter. That works out at $5.75 per share – a massive jump from the third quarter of 2017 (when it reported 52 cents per share). It also blew past analysts’ estimates of $3.08 per share.

Amazon is one of those companies that so regularly outperforms expectations that investors can get a little carried away – the company’s financials, for the most part, remain incredibly strong. More worrying, however, is Amazon’s guidance for the fourth quarter. Amazon says it’s expecting sales in the region of $66.5 billion to $72.5 billion. Consensus estimates would prefer to see sales of $73.8 billion. This would work out as sales growth between 10% and 20% - much lower than the 30% the company delivered a year ago.

According to Amazon’s chief financial officer, Brian Olsavsky, fourth quarter revenue has three large shadows hanging over it: first, currency exchange rates are going to make a significant impact; second, comparables will be tougher, as Whole Foods will now have an impact (it’s a year since Amazon acquired the business); and third, Prime subscription revenue used to be bundled up in the fourth quarter – now, Amazon chooses to spread it out over the year. Investors don’t seem to be overly comforted by these explanations, but they seem sensible enough.

Olsavsky reiterated the company’s confidence on a conference call last week, saying: “Much of our revenue for the quarter but also for the year comes in a very tight window between the middle of November and the end of the year, so it’s always very difficult for us to estimate. We are very bullish on the fourth quarter and we just have to see how revenue comes in.”

Dominion holds Amazon in its Global Trends Ecommerce Fund.

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