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Amazon (AMZN) Q3 Earnings Miss, Revenues Beat Estimates

Zacks Equity Research

Amazon AMZN reported third-quarter 2019 earnings of $4.23 per share, missing the Zacks Consensus Estimate by 23 cents. Further, the figure declined 26.4% from the year-ago quarter.

Net sales of $69.981 billion comfortably surpassed the Zacks Consensus Estimate of $68.369 billion and came within management’s guided range of $66 billion and $70 billion. Further, the figure improved year-over-year growth of 24%.

Excluding the unfavorable foreign exchange impact, sales would have reflected an improvement of 25% from the prior-year quarter.

North America revenues (60.9% of sales) increased 24.1% from the year-ago quarter to $42.64 billion. International revenues (26.2% of sales) climbed 18% year over year to $18.35 billion. Amazon Web Services (AWS) revenues (12.9% of sales) surged 34.7% year over year to $8.99 billion.

Year-over-year top-line growth was driven by solid momentum across Prime on account of strong performance of Amazon’s free one-day delivery service and expanding Prime Video content. Further, strengthening Amazon Web Services (AWS) services and smart home products offerings contributed to the company’s third-quarter results.

However, shares of Amazon have plunged 5.7% in the pre-market trading, which can be attributed to unimpressive guidance for this holiday season.

Moreover, the company’s accelerating transportation and fulfillment center costs related to fast delivery services remains an overhang. Further, intensifying competition in both retail and cloud computing space is a headwind.

The company witnessed slowdown in growth rate of AWS sales in the reported quarter. This remains a woe.

Nevertheless, Amazon is making every effort to capitalize on this holiday season and stays optimistic about its delivery capabilities, backed by to its Prime Free One Day service. This remains a positive.

Further, its expanding original series content portfolio remains encouraging. Further, AWS has revealed plans for opening 10 Availability Zones and three more AWS Regions in Indonesia, Italy, and South Africa. All these endeavors are likely to aid Amazon’s business growth in the near term.

Amazon.com, Inc. Price, Consensus and EPS Surprise

Momentum Across Prime, Fashion & Music Streaming

Amazon Prime continued to gain traction during the reported quarter with expanding fast delivery services.

AmazonFresh service, which enables Prime members to receive delivery of daily essential goods and grocery items at an ultrafast speed, was introduced in cities like Indianapolis, Houston, Minneapolis and Phoenix.

Further, the company benefited from robust content portfolio. During the third quarter, Prime Video streamed Amazon Original series namely The Boys, Carnival Row and Undone.

Furthermore, Amazon original shows won 15 Emmy awards in the third quarter. Notably, Fleabag, which received four Emmy awards, was the primary reason behind the staggering number. Additionally, the Prime Video reached the third season of streaming NFL Thursday Night Football games in the reported quarter. Notably, in order to deliver enhanced video experience, the company unveiled Next Gen Stats on X-Ray feature for viewers.

The company also continued to gain traction in the global streaming space on the back of its expanding regional content, which added The Family Man (India), El Corazón de Sergio Ramos (Spain), Borussia Dortmund (Germany), The Bachelor (Japan) and El Juego de las Llaves (Mexico), to name a few.

Apart from these, the company expanded international presence of Prime by launching the subscription service in Brazil. Further, Amazon introduced Prime Student in France, Italy, and Spain.

Further, the company ramped up initiatives in the fashion world by launching a new service called Personal Shopper by Prime Wardrobe. Additionally, the company’s children’s brand, Spotted Zebra, teamed up with Disney and launched its collection featuring Disney characters. Also, Amazon Fashion has made brands such as Tommy Hilfiger, 3.1 Phillip Lim, Vince Camuto and Rihanna’s Savage X Fenty available.

Coming to music streaming, the e-commerce giant rolled out Amazon Music HD, which is a noteworthy step.

Expanding AWS Portfolio: A Key Catalyst

AWS continued to remain one of the company’s key growth drivers, witnessed significant improvement in the top line driven by expanding services portfolio that helped it in winning a number of customers during the reported quarter.

The company announced the general availability of several services — Amazon Forecast, AWS Lake Formation, Amazon Quantum Ledger Database and AWS IQ. Further, AWS made its new GPU-powered Amazon Elastic Compute Cloud (Amazon EC2) instance, G4 instances, generally available.

Further, expanding regions continued to act as tailwinds. The company opened AWS Middle East (Bahrain) Region in the third quarter. Currently, the number of availability zones and regions of AWS stands at 69 and 22, respectively.

We note that Amazon won a number of customers during the reported quarter — Cerner Corporation, The Globe and Mail, Galanz and Huashan Hospital.

Alexa, Fire TV & Echo Gaining Traction

Amazon continued to enhance the skills and features of Alexa during the reported quarter. Features like Optional auto-deletion of voice recordings, Show and Tell, Frustration Detection, political campaign donations, Alexa Guest Connect, Drop In everywhere, Alexa Connections and photo sharing delivered enhanced user experience.

Additionally, Alexa Skills Store comprises over 100,000 skills. Education Technology skills were made available during the reported quarter. Further, increasing number of devices compatible with Alexa remains a major positive.

Notably, the virtual assistant is now capable of controlling above 85,000 smart home products from more than 9,500 brands.

During third-quarter 2019, Amazon launched 5 Echo smart speakers namely — All-new Echo, Echo Flex, Echo Dot with clock, Echo Show 8 and Echo Studio.

Further, it unveiled a wireless earbud with Bose Active Noise Reduction Technology and hands-free access to Alexa called Echo Buds. Additionally, Amazon introduced Alexa enabled prescription-ready glasses and a smart ring — Echo Frames and Echo Loop, respectively.

Additionally, Amazon unveiled Eero mesh Wi-Fi router with inbuilt Alexa. Moreover, it introduced voice-controlled Amazon Smart Oven with built-in Echo Dot.

Further, the company banked on Fire TV, which has now more than 37 million active users worldwide. Notably, Amazon announced 20 new Fire TV products during the reported quarter, thereby expanding its Fire TV product family.

Quarter Details

Product sales (56.8% of sales) increased 17.7% year over year to $39.73 billion. Service sales (43.2% of sales) surged 32.5% from the year-ago quarter to $30.26 billion.

Operating expenses were almost $66.82 billion, up 26.4% from the year-ago quarter. Cost of sales, fulfillment, marketing, technology & content, general & administrative and other operating expenses improved 18.6%, 16.8%, 47.9%, 25.1%, 14.3% and 7.5%, respectively.

As percentage of revenues, operating expenses expanded 210 bps on a year-over-year basis to 95.5%.

Operating income declined 15.2% from the year-ago quarter to $3.16 billion. Operating margin contracted 210 bps from the year-ago quarter to 4.5%.

Operating income for North America and AWS came in $1.28 billion and $2.26 billion, down 36.9% and up 8.9%, respectively.

International segment reported a loss of $386 million compared with the year-ago quarter’s loss of $385 million.

Guidance

For fourth-quarter 2019, Amazon expects net sales between $80 billion and $86.5 billion. The figure is anticipated to grow in the range of 11-20% on a year-over-year basis. The Zacks Consensus Estimate for net sales is pegged at $86.88 billion.

Management projects an unfavorable impact of approximately 80 bps from foreign exchange rates.

Operating income is expected between $1.2 billion and $2.9 billion compared with $3.8 billion in fourth-quarter 2018.

Zacks Rank & Stocks to Consider

Currently, Amazon carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Stamps.com STMP, Booking Holdings BKNG and Carvana CVNA. While Stamps.com sports a Zacks Rank #1 (Strong Buy), Booking Holdings and Carvana carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Stamps.com, Booking Holdings and Carvana is currently pegged at 15%, 13.08 and 9%, respectively.

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Click to get this free report Stamps.com Inc. (STMP) : Free Stock Analysis Report Amazon.com, Inc. (AMZN) : Free Stock Analysis Report Booking Holdings Inc. (BKNG) : Free Stock Analysis Report Carvana Co. (CVNA) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research