Amazon's Earnings Breeze Past Expectations: 5 Metrics You Should See

Amazon (AMZN -1.64%) reported strong third-quarter results after the market close on Thursday, but shares of the e-commerce and cloud computing titan fell by 1.9% in after-hours trading. We can attribute the market's slightly negative initial reaction to management's fourth-quarter operating income guidance, which was lighter than many investors were probably expecting based on Wall Street's consensus estimate for the bottom line. 

There was plenty of great news in the report, however. Both revenue and earnings easily beat analysts' projections, and fourth-quarter top-line guidance also came in higher than the Street had been expecting.

Here's an overview of the technology giant's quarter, along with its guidance.

Image source: Amazon.

1. Revenue surged 37%

Amazon's net quarterly sales surged 37% year over year to $96.1 billion, handily beating the $92.7 billion Wall Street had expected. The company also sailed by its guidance range of $87 billion to $93 billion. Excluding the boost from foreign-currency exchange, revenue jumped 36%.

The company's year-over-year revenue growth understates the strength of its underlying performance. That's because its huge annual Prime Day event was pushed back from its usual spot in the third quarter to the fourth (it was held in mid-October) due to the COVID-19 pandemic. 

For context, in the second quarter, Amazon's revenue rose by 40% year over year (41% in constant currency), and in the first quarter, it increased 26% (27% in constant currency).

Here's how revenue broke out by segment:

Data source: Amazon. YOY = year over year. 

Amazon's e-commerce businesses continue to benefit from the pandemic, as many consumers continue to avoid brick-and-mortar stores as much as possible.

For context, in the second quarter, year-over-year revenue growth in its North America, international, and AWS segments was 43%, 38%, and 29%, respectively.

2. Operating income soared 94%

Operating income increased 94% year over year to $6.2 billion, which sped by Amazon's guidance of $2 billion to $5 billion.  

Data source: Amazon. YOY = year over year.

All three business segments continued to perform well. However, with respect to the e-commerce segments, investors should be aware that the company faced unusually easy year-ago comparables. As I wrote in my earnings preview, "In the year-ago period, EPS declined 26% year over year, driven by Amazon's heavy spending on upgrading its standard Prime free delivery benefit from two days to one." 

To be clear -- Amazon's Q3 operating income and bottom-line performances were robust, but they weren't quite as stellar as the year-over-year growth percentages might imply because the growth is being measured against a period when those metrics were atypically low. 

3. EPS rocketed 192%

Net income tripled to $6.3 billion. This translated to earnings per share (EPS) growing by 192% to $12.37. Wall Street was only looking for EPS of $7.41. In the second quarter, EPS rose by 97% year over year, so the earnings growth rate also accelerated sequentially.

4. Operating cash flow jumped 56%

Operating cash flow increased by 56% year over year to $55.3 billion for the trailing 12 months. Free cash flow rose 26% to $29.5 billion.

5. Fourth-quarter revenue is expected to grow by 28% to 38%

For Q4, Amazon guided for net sales in the range of $112 billion to $121 billion, which would amount to year-over-year growth of 28% to 38%. The midpoint of that outlook range well exceeded Wall Street's consensus estimate of $112.3 billion.

The company also forecasts that its operating income will land between $1.0 billion and $4.5 billion, compared with $3.9 billion in the year-ago period. That range means management thinks operating income could decline by as much as 74% or rise by as much as 15%. The guidance assumes the company will face about $4 billion more in costs related to COVID-19.

Going into the report, Wall Street had been modeling for Q4 EPS growth of 42% year over year. So, we can deduce that Amazon's operating income guidance fell short of analysts' expectations. Investors shouldn't be concerned. Management has been being quite conservative with its guidance during the pandemic.

In short, Amazon turned in a great quarter. Moreover, it seems poised to have a blow-out holiday quarter, given that the COVID-19 pandemic is again growing rapidly worse across much of the United States and Europe. As CEO Jeff Bezos said in the earnings release: "We're seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season."