Shares of Amazon.com (NASDAQ:AMZN) fell as much as 10.1% lower on Friday, following the release of third-quarter earnings on Thursday evening. There was nothing terribly wrong with the third-quarter results themselves but many investors shrugged off the strong numbers in the rearview mirror to focus on modest guidance for the upcoming holiday quarter instead. As of 2 p.m. EDT, Amazon's shares had recovered somewhat to a 6.8% drop.
In the third quarter, Amazon's earnings rose 11-fold to $5.75 per diluted share. Revenue grew 30% year over year, stopping at $56.6 billion. Your average analyst had been looking for earnings of $3.14 per share on sales in the neighborhood of $57.1 billion. So Amazon crushed Wall Street's earnings targets but fell short of the consensus revenue projection. On the other hand, Amazon's management offered sales guidance three months ago that pointed to roughly $55.8 billion on the top line. From that perspective, even the revenue result was a positive surprise.
However, Amazon's forward-looking revenue guidance pointed to roughly 15% year-over-year growth in the holiday-season fourth quarter. That would be one of the slowest sales growth performances Amazon has delivered in the last decade, and that's why many investors are reaching for their "sell" buttons today.
In the earnings call, CFO Brian Olsavsky explained the rationale behind the modest revenue guidance.
- This will be the first apples-to-apples comparison since Amazon bought grocery chain Whole Foods in the fall of 2017. That acquisition has been pushing year-over-year revenue comparisons higher in 2018 and that effect is coming to an abrupt end here.
- The way Amazon accounts for its Prime program has changed. In recent years, the revenue recognition for this customer loyalty program was based on the number of free shipping discounts that were used by Prime customers in any given quarter, which naturally tilted the balance in favor of the huge shipping volumes of the fourth quarter. These days, it's a straight-line amortization approach that spreads the Prime subscription payments evenly over the entire year. The effect of this is small but significant at roughly $300 million.
- The holiday season is always a big deal for Amazon, not to mention its retailer peers and rivals. None of them have a perfect crystal ball and it's a guessing game. This time, Olsavsky decided to take a conservative view of the potential holiday results. He underestimated third-quarter sales and could be wrong again in the fourth quarter -- in either direction.
The 15% growth target is still not terribly impressive, but it's also not the end of the world. Amazon investors have still enjoyed a 52% gain in 2018 and 83% over the last 52 weeks, so perhaps a small correction was in order.