Online retail powerhouse Amazon.com, Inc. (ticker: AMZN) posted earnings after the closing bell on Thursday, missing Wall Street earnings expectations but beating on the top line. AMZN stock plunged, falling roughly 7% in after-hours trading.
Revenue jumped 24% to $70 billion, easily beating the $68.81 billion analysts were expecting. Earnings per share (EPS) clocked in at $4.23, below the $4.62 per share consensus estimate.
The e-commerce giant also guided for fourth-quarter revenue between $80 billion and $86.5 billion, the midpoint of which is $83.25 billion. That figure was well below Wall Street expectations for $87.37 billion.
Amazon also ended up dramatically missing what Wall Street was expecting when it came to fourth-quarter guidance for operating income. The company doesn't provide forward guidance for EPS, but does for operating income, giving a range of between $1.2 billion and $2.9 billion for the fourth quarter. That midpoint guidance number comes out to $2.05 billion.
For context, that was less than half the amount analysts surveyed by FactSet had expected AMZN to guide for. The FactSet consensus called for fourth-quarter operating income of $4.19 billion.
"With an EPS miss, investors in the short-term are not buying the higher costs of internal infrastructure investments," says Madhan Kanagavel, founder and CEO of FileCloud, an enterprise file-sharing company. "The ongoing shift to higher-margin business segments including AWS is where Amazon can justify its lofty valuation over the longer term. Amazon and Microsoft ( MSFT) are in the middle rounds of a long-term tech boxing match of AWS versus Azure. May the best tech giant win."
Amazon Web Services Growth
Another very closely watched figure for Amazon is growth in its cloud computing division, Amazon Web Services.
Market consensus for AWS revenue in the third quarter was $9.16 billion, according to analysts surveyed by FactSet. Amazon reported AWS revenue of $9 billion, up 35% year-over-year.
Although this was just a slight miss, it sends the message that perhaps the days of ridiculously high cloud computing growth are over. Just a year ago, AWS revenue was growing at a 46% clip, and growth was even more absurd before that.
The reason that figure is so closely watched is simple: margins. Simply put, this is the division that sets Amazon apart from the rest of its peers in retail, even in e-commerce. Cloud computing is an extremely high margin business, and since it's simultaneously one of the fastest growing parts of AMZN, each quarter Amazon is able to enjoy larger and larger cash coffers from which to finance extremely competitive rates on all sorts of items it sells on its site.
Even if Amazon merely matches the prices a competitor is offering -- Walmart ( WMT) or Target Corp. ( TGT), for instance -- it's able to use the extra AWS scratch to fund another high-cost differentiator: one-day shipping.
Without a cash cow like AWS to fund such extravagancies, Amazon's competitors have been left in the dust, which is why investors continue to enjoy 20% revenue growth, an extreme rarity for companies of Amazon's size.
In the cloud space, the closest competitor is really Microsoft, which is also being driven steadily higher by its cloud computing unit, Azure.
Microsoft reported earnings on Wednesday and Azure's growth rate was a major focus, as Azure revenue soared 59% higher from the year-ago quarter. It doesn't yet break out Azure revenue or operating income, but at the moment it's certainly the No. 2 cloud company in the industry.
Other Highlights From Amazon's Earnings
The infrastructure investments that may be partially responsible for Amazon's earnings miss also contributed to an EPS miss last quarter; specifically, Amazon is spending heavily on building out Prime's free one-day delivery service. It's what Kanagavel means when referencing the expenses that short-term-minded investors might not appreciate.
Still, there is one benefit from this spending (aside from the obvious advantage of building up its moat). In theory, boosting the attraction of Prime also boosts both shorter- and longer-term revenue growth, even if it comes at the expense of short-term profits.
The theory is that it will pay off in the future, and delayed gratification is what Amazon's entire success has been built on. While guidance might not be where analysts want it, 24% revenue growth was well above what analysts expected in Q3, and there's no reason to stop trusting Jeff Bezos now.
Over time, this swift sell-off in Amazon stock may prove to be a knee-jerk overreaction.
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