When Amazon.com (AMZN 0.77%) reported worse-than-expected profit for its third quarter last Thursday, shares fell about 6% in after-hours trading. While shares have recovered slightly in the few trading days since the report, the stock is still down 4%.
Amazon warehouse. Image source: Amazon.com.
Here's a look at the numbers that may be behind Amazon stock's sell-off, as well as a look at some other highlights from the company's third-quarter update.
4 likely reasons for the stock's sell-off
Profitability increased, but not as rapidly: In the past, increasing profitability was a major strong point for the company -- operating income jumped from $464 million in the second quarter of 2015 to $1.3 billion in the second quarter of 2016.
But the same can't be said about Q3. Third-quarter operating income increased from $406 million in the year-ago quarter to $575 million in Q3, marking a dramatic deceleration in year-over-year growth compared with Q2 growth. Further, operating income actually declined sequentially.
Amazon's record-setting quarterly profit streak ended: For three quarters in a row, Amazon was setting new records for quarterly profits. But this streak ended in Q3, when Amazon reported earnings per share of $0.52 -- lower EPS than in any of the last three quarters.
Earnings per share missed estimates: Amazon's EPS of $0.52 was well below a consensus analyst estimate for $0.78, according to Thomson Reuters.
Costs are expected to continue to weigh on results: Going into Q4, management said it would continue to invest heavily. This is reflected in the company's operating income guidance, which calls for fourth-quarter operating income between $0 and $1.25 -- a range that's down significantly from operating income of $2.2 billion in the fourth quarter of 2015.
5 reasons to still bet on Amazon stock
Image source: The Motley Fool.
Growth initiatives should help Amazon over the long haul: Amazon's higher costs today represent tangible investments set to reinforce the company's competitive advantages.
Management pointed to two key areas weighing on earnings during the quarter: the opening of 18 new warehouses ahead of the holidays (up from a previous quarterly record of 11) and higher costs for signing content deals and producing original video content form Amazon Prime Video.
These investments are important to Amazon's compelling value proposition to its Prime members.
Despite an earnings miss, EPS growth was still impressive: EPS of $0.52 were up more than 200% compared with EPS of $0.17 in the year-ago quarter.
Cash flow is soaring: In the trailing-12-month period ended Sept. 30, operating cash flow has increased an impressive 49%. And free cash flow, which is equal to operating cash flow less capital expenditures, has increased 59% during this same period.
Sales increased rapidly: Revenue in Amazon's third quarter increased 29% year over year. To be fair, this growth is notably down from the e-commerce giant's 31% year-over-year increase in revenue in its prior quarter.
More sales growth to come: Amazon expects another quarter of solid growth during the holiday season, guiding for a 17% to 27% year-over-year increase in fourth-quarter revenue. The midpoint of this expected range is about in line with Amazon's 22% year-over-year revenue growth in the fourth quarter of 2015.
While Amazon's costs associated with growing its business recently are certainly steep -- and are probably higher than most investors were expecting -- the e-commerce giant's overall results are still undoubtedly solid. Even more, if Amazon's historical success with growth investments offers any precedent for how high third- and fourth-quarter costs will pay off over the long haul, the company's continued willingness to make big, timely investments could potentially be good news for investors, laying groundwork for future margin expansion.
