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Amazon shares see major declines after earnings- here's why

Yahoo Finance's Brian Sozzi and Julie Hyman discuss Amazon's Q3 earnings.

Video Transcript

JULIE HYMAN: You might delay your iPhone purchase and then eventually get it, but is the same thing true of things you're going to buy on Amazon? Maybe not, right. Maybe you can't get your toilet paper right away on Amazon. Maybe you're just going to go to Target, or to the grocery store, or wherever else you go to buy these sorts of things.

Amazon, of course, missing on both the top and bottom line. And this company also coming out with a current quarter forecast below estimates. At most, Amazon says, it's going to have $140 billion in revenue in the current quarter versus the $141.6 billion estimate. And importantly, operating income could be as low as 0 for this current quarter. That's what the company is saying.

Now, here, the standout was the Amazon Web Services business, which did see sales rise 39%. But revenue from its retail operations up just about 3%. Other, quote unquote, "mostly advertising, up 49%." So really, the issue here is at the retail operation and as the sort of post-pandemic wave has been shifting consumer buying habits.

Whereas Amazon was before sending out vans that were full and dropping off at every house in the neighborhood, I suppose. Now, they're having to send out empty vans to get people their stuff on time, they're having to hire a lot of people. And all that stuff, Brian, cost money.

BRIAN SOZZI: Yeah, I've seen a lot of-- or probably not a lot, I've seen several aggressive investment cycles for Amazon over the course of my career. And I think if you are an Amazon shareholder today, you have to be wondering, is Amazon entering another one of these major investment cycles over the next 12 to 18 months? And this quarter suggests, heck yeah, It is.

Look at some of these expenses here, they're looking at a $4 billion year over year step up and expenses. In other words, $4 billion in expenses is expected to be higher in the fourth quarter this year versus last year. A $1 billion year over year increase in digital content investments. So clearly Amazon wants to keep winning awards for its various content.

And then lastly, $1 billion of reduced leverage in its fulfillment network. In plain English, that is Amazon investing more in human beings and its fulfillment network to get you packages even faster. And the tone off the conference call, Julie, was that Amazon is going to remain very aggressive in investing its capital to support the growth in its network. And I think you're going to see-- you could very well see another rerating in Amazon stock, not unlike what might happen over at Apple.

JULIE HYMAN: Yeah, to your point, Andy Jassy, who this is the first full quarter over which he is presiding. And you highlighted this commentary force from the conference call. "In the fourth quarter, we expect to incur several billion of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs. It will be expensive for us in the short term." So that sort of combining it all, right.

When you're talking about these employment costs, as of September 30th, the company employed almost 1 and 1/2 million full and part time workers. That is up about 30% from a year earlier. And during the third quarter, new higher bonuses, wage increases added a billion dollars to the company's expenses. And the CFO Brian Olsavsky said, that cost is likely going to double in the holiday period.

So just to put a fine point on exactly what kind of numbers we are talking here, so that implies you could see $2 billion in costs. Not just base wage costs, that is new higher bonuses and wage increases for Amazon, which is just, Brian, sort of an incredible number.

BRIAN SOZZI: And despite that incredible number, Julie, just like we're seeing with Apple here, you're coming, you're seeing the street this morning really come out here and defend Amazon. And I know the street loves Amazon. Amazon Prime is amazing, their content is amazing. And at the end of the day, it's Amazon, it was created by Jeff Bezos who is now the former CEO.

But still the fundamentals of the business, at least over the next 12 to 18 months, might look a heck of a lot different than they did the past two years. I mean, Amazon when they say they're going to invest aggressively in their business, historically, that has meant margins come under pressure. And they came under pressure in every single segment, North America, AWS, international all down year over year in this quarter.

And then real quick, Julie, I'll say this for any noob investors out there. Whenever you see a CEO change or, more specifically, a founder change, usually, the 12 to 18 months after then could be not necessarily that great. Now I'm not saying Andy Jassy is not an experienced guy. I mean, he's created Amazon Web Services for all intents and purposes.

But when you saw Jeff Bezos announce that he was moving to that executive chairman role, that should have been the tell to you that over the next two years, things might be different for Amazon. And I've seen this time and time again, not just within Amazon, many other companies, when you see that type of leadership change, usually, leaders want to go out on top. And clearly Bezos did, because Jassy is now left dealing with this mess.

JULIE HYMAN: Although, to be fair, the other big company that we're talking about this morning, Tim Cook turned out to be a pretty good CEO for Apple.

BRIAN SOZZIE: A little different circumstances, a little different.

JULIE HYMAN: Yes, certainly. And there were some growing pains as well there along the way. Two more points I just want to make about Amazon quickly. When you're talking about investment in the business and investment cycles, this feels different to me because this feels reactive rather than proactive, right. In other times, where we have seen Amazon do these investment cycles, it was in some way to grow the business. This more seems like it's to keep up with the existing business, right. Doesn't that-- so that feels a little bit different to me in terms of the past investment cycles.

And the other comment I would make is for Amazon investors, the whole idea of building up the Amazon Web Services business was in part to have a hedge, right, to have another growth engine. And in some ways, that strategy was successful this quarter, right. Amazon Web Services had its fastest growth rate since early 2019 with that 39% gain. Now, of course, it is still not a huge part of the business, but it's a significant part of the business. And so maybe if you're an investor, you take some heart from the idea that that part of the business is still working, yes.

BRIAN SOZZI: And there's going to be aftershocks here, Julie, from this investment cycle. Whenever I see Amazon go into an investment cycle, it has aftershocks. If you're UPS, you're FedEx, you see these results, you see this common type of commentary, you think, wow, I'm going to have to get even faster. If I'm a Walmart, if I'm a Target, you're concerned that Amazon is really, really, really, really more focused on same day delivery.

I think the amount of resources they're putting behind if I place an order now, getting it within a couple of hours, I mean, that is a big, big competitive advantage for Amazon.

JULIE HYMAN: Yeah, if I don't get the last minute order of Halloween masks for my son by today or tomorrow, it's going to be a problem.

BRIAN SOZZI: What are they?

JULIE HYMAN: It's not like a specific thing, it's just sort of vague, scary masks stuff.

BRIAN SOZZI: Yeah, I'm dressing up as a TV anchor. If they want to dress up like that, you know, just take a picture of me.