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Amazon shares tumble after earnings flop

Nicole Sinclair
Markets Correspondent

Amazon (AMZN) shares slid Thursday after its third quarter report. The company posted EPS of $0.52, short of expectations for $0.82. Revenue came in at $32.71 billion, in line with estimates for $32.65 billion.

After years of uneven profits, investors have had higher expectations for the company to make money, especially after founder, chairman and CEO Jeff Bezos reported the company’s first outsized earnings beat in the first quarter of this year.

The stock ran up 21% into the quarter, also reflecting investor high expectations.

The all-important Amazon Web Services (“AWS”) continues to be an important driver for the company, with third quarter revenue for the segment coming in at $3.2 billion, up 54.5% and ahead of estimates for $3.13 billion.

As Bezos said at the Economic Club of New York on Thursday, AWS had the unique advantage of having seven years before facing a like-minded competitor. This contrasts with an already generous two-year typical first mover advantage, Bezos explained.

Looking ahead, the company expects fourth quarter operating income of between $0 and $1.25 billion, below estimates and compared to $1.1 billion in the fourth quarter of 2015. And it sees revenue of $42 to $45.5 billion, compared to estimates for $44.6 billion.

“The expansion of Amazon Web Services has thus far been quite costly, although it is clear that AWS is at a tipping point and can (and will) generate significant leverage going forward,” he wrote.

With improved profitability—aided by AWS—the company was expected to increase its annual spending on video content by $500 million per year from an estimated $3 to $3.5 billion annual run rate, according to Wedbush’s Michael Pachter.

CFO Brian Olsavsky confirmed increased investments on the conference call, highlighting a focus on shipping centers, new warehouses and original productions for video content.

Prime membership also continues to grow, though Amazon does not reveal the specific number of subscribers. Analysts responded positively to “Prime Day” in July. As Bezos said at the Economic Club, “there’s no reason in business to boast about your accomplishments” and he reiterated the number of subscribers is “large.”

A return to investments—not such a bad thing

Bezos has a long history of putting potential profit into investments, with no signs of stopping now as the company ventures into new areas like shipping and original content.

“It’s the combination of risk taking and long term investment that makes Amazon unique,” Bezos said Thursday at the Economic Club of New York.

Bezos has been ambitious in expanding the business further, investing in digital media through its Kindle, Fire TV, Fire phone, Fire TV stick and Echo hardware to dominate home. The company has also invested in Prime instant video streaming and Amazon studios.

While the stock sold off initially on its quarterly announcement and conference call, its flirtation with all-time highs—amid long-term investment cycles—may make this just a temporary dip, according to many bulls on the stock.

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