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Amazon Earnings Miss Estimates: 5 Metrics Investors Should See

By Beth McKenna - Oct 24, 2019 at 8:59PM

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Amazon stock fell nearly 7% in after-hours trading after the e-commerce giant reported Q3 earnings on Thursday after the closing bell.

Amazon.com ( AMZN -1.38% ) reported third-quarter 2019 results after the market closed on Thursday.

Like last quarter, the e-commerce and tech titan missed Wall's Street's earnings estimates, but exceeded top-line expectations. Moreover, the reported quarter was the first time in two years that Amazon's earnings have declined year over year.

Shares traded down in the 6.5% to 6.9% range during Thursday's after-hours trading session. We can attribute the market's ire to the combination of weak earnings and fourth-quarter guidance coming in softer than analysts were expecting.

Here's an overview of Amazon's quarter, along with its guidance for the fourth quarter, using five metrics.

An Amazon box traveling on a conveyor belt in a fulfillment center.

Image source: Amazon.

1. Revenue jumped 24%

Amazon's net quarterly sales increased 24% year over year to $70.0 billion, beating the $68.8 billion Wall Street had expected and landing at the high end of the company's guidance range of $66 billion to $70 billion. Excluding the negative impact from foreign currency exchange, revenue climbed 25%.

The revenue growth rate represents an acceleration from 20% in the second quarter (21% in constant currency) and 17% in the first quarter. We can attribute this revved-up earnings growth to the company's upgrading of Amazon Prime's core free delivery benefit from two days to one day.

Here's how revenue broke out by segment:

Segment

Revenue for Q3 2019

Change (YOY)

North America

$42.6 billion

24%

International

$18.3 billion

18%

Amazon Web Services (AWS)

$9.0 billion

35%

Total

$70.0 billion

23%

Data source: Amazon. YOY = year-over-year.

Amazon's retail segments both experienced a sequential acceleration in sales growth, as in the second quarter, North America's revenue increased 20% and International's grew 12% year over year. This was driven by the Prime standard delivery speed upgrade.

The company's cloud computing service continued to grow rapidly, though its sequential sales growth rate continued to decelerate. In constant currency, AWS's revenue has increased year over year as follows: 35% in Q3 2019, 37% in Q2 2019, and 42% in Q1 2019.

2. Operating income declined 15%

Operating income decreased 14% year over year to $3.2 billion, which slightly surpassed Amazon's guidance of $2.1 billion to $3.1 billion.

Segment

Operating Income for Q3 2019

Change (YOY)

North America

$1.3 billion

(37%)

International

($386 million)

--

AWS

$2.3 billion

9%

Total

$3.2 billion

(15%)

Data source: Amazon. YOY = year over year.

North America's 37% operating income decline was driven by the cost of transitioning the core Prime free delivery benefit from two days to one. Last quarter -- which is when this transitioning began -- this metric fell 15%.

International's result is a positive, as this segment typically has experienced year-over-year declines.

AWS's operating income growth continued to decelerate, as this metric was 21% last quarter. The segment's operating margin contracted to 25.1% from 31.1% in the year-ago period, and also edged down from 25.3% in the second quarter. On the earnings call, CFO Brian Olsavsky said AWS's step-up in costs was largely due to it beefing up its sales and marketing teams and secondarily due to increased spending on infrastructure.

3. EPS dropped 26%

Net income fell 26% year over year to $2.1 billion. Earnings per share (EPS) dropped 26% to $4.23. Wall Street was looking for EPS of $4.62, so Amazon's result fell considerably short.

4. Operating cash flow rose 33% over the trailing-12-month period

Operating cash flow jumped 33% year over year to $35.3 billion for the trailing 12 months. Free cash flow rocketed 53% to $23.5 billion.

5. Operating income is expected to fall 24% to 68% in Q4

For the fourth quarter, Amazon guided for net sales between $80.0 billion and $86.5 billion, representing growth of 11% to 20% year over year. This range falls below the $87.4 billion Wall Street was projecting.

The company expects operating income between $1.2 billion and $2.9 billion, representing a decline of 24% to 68% from the year-ago period. The Street doesn't provide operating income estimates, but we can deduce that this outlook fell short of expectations because analysts had been projecting EPS growth of 7.5% in the fourth quarter.

Keep your eyes on the long game

Long-term investors shouldn't be concerned about this quarter's results or next quarter's weaker-than-anticipated guidance. As with last quarter, a main reason for Amazon's weak showing on the profit front was the expense of upgrading its standard Prime free delivery benefit from two days to one. The company is sacrificing some current profits to fuel longer-term growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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