E-commerce and cloud computing veteran Amazon.com (NASDAQ:AMZN) posted third-quarter results after the closing bell on Thursday. The report itself was a bit of a mixed bag, showing strong sales but soft earnings. As expected, investors reacted more directly to the company's guidance for the holiday-themed fourth quarter. Amazon shares took a 7% dive in after-hours trading since the outlook for the next quarter failed to impress investors.

Amazon's third-quarter results by the numbers

Metric

Q3 2019

Q3 2018

Change

Revenue

$70.0 billion

$56.6 billion

24%

Operating income

$3.16 billion

$3.72 billion

(15%)

Net income

$2.13 billion

$2.88 billion

(26%)

GAAP earnings per share (diluted)

$4.31

$5.91

(27%)

Data source: Amazon.com. GAAP = generally accepted accounting principles.

What's new with Amazon?

  • Your average analyst was expecting earnings near $4.62 per share on sales in the neighborhood of $68.8 billion. Amazon fell short of Wall Street's earnings target while crushing the consensus revenue projection.
  • The third-quarter results were a clean sweep as compared to Amazon's own guidance. The midpoint of the revenue guidance range stood at $68.8 billion and the top end of the operating profit target -- a billion dollars wide -- stopped at $3.10 billion.
  • Shipping costs rose 46% year over year, amplified by a more ambitious next-day delivery target for orders placed under the Amazon Prime program.
  • E-commerce sales entirely under Amazon's brand and management rose 21% year over year while third-party sales increased by 27%. Third-party revenue accounted for 18.9% of Amazon's total sales in the third quarter, up from 18.8% in the second quarter and 17.1% in the year-ago period.
  • The Amazon Web Services cloud computing platform posted 35% growth, adding up to $9 billion. AWS collected 12.9% of the quarter's total revenue, up from 10.8% a year ago.
  • Amazon's stated long-term goal is to "optimize free cash flows." On that note, free cash flows added up to $4.5 billion this time. That's 26% below the year-ago period's $6.1 billion.
A parked blue 18-wheeler truck with the Amazon Prime logo in white.

 Image source: Getty Images.

Color commentary from the executive suite

The new one-day shipping policy in Amazon Prime is ramping up just as the company heads into the crucial holiday season. Management reported an $800 million additional expense for this intense shipping program in the second quarter, when it was introduced. Those costs increased by an unknown amount in this third-quarter report and are expected to hit $1.5 billion amid the fourth quarter's holiday order frenzy. CFO Brian Olsavsky provided more detail on the single-day shipping policy in Amazon's third-quarter earnings call.

"We've built that into our Q4 guidance estimate, but we're very pleased with the customer response to one-day. You can see it in our revenue acceleration and also in our unit growth acceleration," Olsavsky said. "I think we're well-positioned to make it the best holiday ever for our customers. I think one-day should help with holiday shipping."

Looking ahead

Amazon's fourth-quarter guidance calls for revenue in the neighborhood of $83.3 billion, roughly 16% above the holiday quarter of 2018. That's well below Wall Street's current consensus view, which stands at $87.4 billion. Analysts also expect bottom-line earnings to rise by 7%. Amazon doesn't provide guidance figures on that level, but operating income was aimed at approximately $2.1 billion. Hitting that target would represent a 45% drop from the $3.8 billion seen a year earlier.

Amazon's stock took a nosedive when this earnings report was released, closing the after-hours trading session 6.7% below the regular closing-bell level. There was nothing wrong with the third-quarter numbers themselves -- I'm pinning the blame squarely on management's soft fourth-quarter guidance.

Some analysts argue that the low holiday targets aren't worse than management setting a low bar and are easy to beat in three months. Amazon does have a history of doing exactly that, and analyst estimates often converge a billion dollars or two above management's revenue goals.

However, a 16% revenue increase would be among the slowest year-over-year growth rates in Amazon's history. Given the stock's lofty valuation of 73 times trailing earnings, in the mold of classic growth stocks, any sign of slower growth rates can trigger a drastic share price cut. That's what we saw today. If you think that Amazon's management is lowballing its fourth-quarter estimates, this looks like a good time to pick up shares at a discount.