Amazon disappoints in Q3: could this be a momentary lapse?

Shares of Amazon.com Inc (NASDAQ: AMZN) fell about 5.0% in extended trading on Thursday after the tech giant reported disappointing results for its fiscal third quarter and gave weak guidance for Q4.

Longer-term outlook remains strong

Despite a significant miss on estimates, the New York Times’ Ed Lee is convinced that the longer-term outlook for Amazon remains promising. On CNBC’s “Closing Report”, he said:

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Supply chain and labour shortage is definitely the issue here. But they’ve doubled their fulfilment network since the start of the COVID-19 crisis. That investment will pay off. Amazon is a services company more than an eCommerce company. The more they lean into the services element, the more it becomes their real value proposition. So, this miss is more just the moment versus the longer-term.

During the same interview, D.A. Davidson’s Tom Forte also agreed that Amazon’s dip was temporary.

Q3 financial performance

Amazon earned $3.2 billion in the third quarter – a massive decline from last year’s $12.37 billion. On a per-share basis, it earned $6.12 on $110.8 billion in revenue that represents a 15% annualised growth. According to FactSet, experts had forecast $8.90 of EPS on $111.55 billion revenue.  

Amazon had already warned that supply chain constraints and labour shortage will hit results this quarter. The issues resulted in an increase in its cost of sales from $57.11 billion to $62.93 billion. At $18.5 billion, costs related to fulfilling and shipping orders was also up more than 25%.

Guidance for the fourth quarter

Even disappointing was the fact that Amazon expects these issues to continue in the holiday season. The American multinational forecasts up to $3.0 billion of operating income on $130 billion to $140 billion in sales for the fourth quarter.

In comparison, analysts are calling for a much higher $7.71 billion of operating income on $142.17 billion in revenue.

Update from individual business segments

Amazon Web Services was still up 39% on a year-over-year basis in terms of sales and up 38% in terms of operating profit. The eCommerce business, however, remained in an operating loss, particularly due to the international operations that bled $911 million in the recent quarter.

North American retail operations also noted a nearly 60% decline in operating profit. Online sales were up only 3.0% – the first time they came in under 10% since early 2017.