Stocks ended the week with another day of heavy selling. The Dow Jones Industrial Average (DJINDICES:^DJI) was down over 500 points in the morning but recovered somewhat in the afternoon. The S&P 500 (SNPINDEX:^GSPC) also had a big loss.
Today's stock market
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All sectors fell today, but consumer stocks were hit particularly hard, with the Consumer Discretionary Select SPDR ETF (NYSEMKT:XLY) losing 3.1%. Technology and internet stocks also fell, with the new Communication Services Select SPDR ETF (NYSEMKT:XLC) dropping 2.7%.
Two closely watched companies reported earnings last night that fueled investor worries. Amazon.com (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) both had surprisingly high profits, but raised concerns about revenue growth.
Amazon feeds worries about consumer spending
Shares of Amazon tumbled 7.8% despite the company reporting a huge profit gain after it issued what the market considered a weak forecast for consumer spending in the final three months of the year. Net sales in the company's third quarter increased 29% to $56.6 billion, missing expectations for $57.1 billion, but coming in above the midpoint of its guidance. Earnings per share of $5.75 were 11 times the EPS in the period a year ago and blew away the analyst consensus of $2.46.
Operating cash flow increased 57% to $26.6 billion and free cash flow soared 93% to $15.4 billion. Revenue growth for Amazon Web Services (AWS), while still torrid, was down a few points at 46%, but operating profit margin improved to 31%, compared with 26% in the period a year earlier, thanks to efficiency improvements in Amazon's data centers. North American sales increased 35% and generated operating income of $2 billion, compared with only $112 million in Q3 last year. International sales grew 13% and the operating loss declined to $385 million from a loss of $936 million last year.
What apparently spooked investors was a forecast of Q4 sales between $66.5 billion and $72.5 billion, below the analyst consensus of $73.9 billion. On the conference call, CFO Brian Olsavsky pointed out that Q4 will be the first report since lapping the Whole Foods acquisition, and that an accounting change for subscriptions will spread out Q4 revenue into other quarters. But despite the superb profit results, the revenue miss and sales guidance were enough to feed investor worries about slowing growth.
Alphabet reports a big earnings gain
Profit at Alphabet, the parent company of Google, was unexpectedly strong in the third quarter, but a narrow miss on revenue was enough to hurt the stock. Class C shares fell 2.2%, while Class A shares declined 1.8%.
Revenue grew 21.5% to $33.7 billion, short of the analyst consensus by $310 million. Earnings per share jumped 36.5% to $13.06, well above expectations of $10.42.
Google advertising revenue grew 20.3% to $29.0 billion; non-advertising revenue, which includes the company's cloud business and Google Play, grew 29.2% to $4.64 billion; and Other Bets, which includes Alphabet's early-stage ventures such as Google Fiber, Verily Life Sciences, and Waymo, had a revenue gain of 24.8% to $146 million. Traffic acquisition costs, an important component in Google's expenses, held steady at 23% of advertising revenue.
A stronger dollar was a headwind for Alphabet this quarter, with currency losses lowering the top line by $305 million -- basically the whole amount of the revenue miss.
Alphabet doesn't provide guidance, but CFO Ruth Porat said on the conference call, "We continue to be pleased with the underlying momentum in our advertising businesses as we apply our strength in machine learning to improve the experience for users and advertisers."
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jim Crumly owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.