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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.

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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.

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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.

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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.

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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.

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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).

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Disclosure: No positions.

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This article first appeared on GuruFocus.