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Buffett Holding Amazon Spooks Investors With Weak Holiday Guidance

Shares of Amazon.com Inc. (NASDAQ:AMZN), a holding of Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B), tumbled over 6% in aftermarket trading on Thursday on the heels of reporting fourth-quarter revenue guidance that missed analysts' expectations.

The Seattle-based retail giant reported net income of $2.1 billion, or $4.23 in earnings per share, compared with net income of $2.9 billion, or $5.75 in earnings per share, in the prior-year quarter. Despite the year-over-year net income decline, revenue of $70 billion outperformed the Refinitiv estimate of $68.8 billion.


Company accelerates operating expenses, lowering operating income and holiday-quarter guidance

Amazon CEO Jeff Bezos said the company is "ramping up" to make its 25th holiday season a landmark season for its Prime customers, members that have acclaimed Amazon's switch from free two-day delivery to free one-day delivery. However, the switch carries high operating costs: cost of sales, fulfillment expenses, marketing expenses, technology expenses and other selling, general and administrative expenses all increased year over year. Operating income of $3.157 billion declined from the prior-year quarter value of $3.724 billion.


Amazon expects fourth-quarter net sales between $80 billion and $86.5 billion, an increase of 11% to 20% compared with revenues in fourth-quarter 2018. Despite this, operating income is expected to range between $1.2 billion and $2.9 billion, down from the prior-year quarter operating income of $3.8 billion. The guidance ranges spooked analyst estimates: Analysts expected net sales guidance of $87.4 billion and operating income guidance of $4.2 billion.

Stock falls as holiday outlook spooks investors

Buffett's conglomerate has not released its third-quarter portfolio as the deadline is 45 days after the quarter ends. As of second quarter-end, Berkshire owned 537,300 shares, dedicating 0.49% of the equity portfolio to the position. While shares averaged $1,862.37 during the second quarter, shares of Amazon traded at an aftermarket low of $1,624.18, down 7.83% from Wednesday's close of $1,762.17. Despite the price decline, GuruFocus estimates that Berkshire has gained 5.52% on Amazon since establishing the holding in the first quarter.


The website ranks Amazon's profitability 9 out of 10 on several positive investing signs, which include a three-year revenue growth rate that outperforms 92.92% of global competitors and a return on assets that is near a 10-year high of 8.15%. Additionally, GuruFocus gives Amazon a four-star predictability rank on consistent revenue and earnings growth over the past 10 years.


Since December 2018, Amazon's operating margin has increased in the double-digits on average over the past five years. According to GuruFocus' loglinear regression model, the retail giant's five-year average operating margin growth rate is 58.40%. Despite this, the company's operating income for the past quarter declined 15% year over year from the aforementioned increase in operating expenses.


In addition to Berkshire, other gurus hoping for merrier results from Amazon during the upcoming quarter include Ken Fisher (Trades, Portfolio), Spiros Segalas (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio).


Disclosure: No positions.

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This article first appeared on GuruFocus.