E-commerce giant Amazon (AMZN 2.10%) is estimating sales growth will slow down in its fiscal third quarter. That's one of several metrics investors will be paying attention to when the company releases results on Oct. 27.
In this segment from "Beat & Raise," recorded on Oct. 4, Fool.com contributors Brian Withers and Parkev Tatevosian discuss what else to look for in Amazon's fourth-quarter earnings results.
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Parkev Tatevosian: Amazon, as most of our viewers will be aware, got a surge in business during the pandemic. The Q3, expectations are for revenue to increase by 16 percent from last year, so that's impressive considering the surge that it experienced last year. Earnings-per-share, however, are expected to decline by 27 percent to $8.95, and I'll touch up on why that's the case. A few things to watch with Amazon is the ever-important fourth-quarter holiday season guide. This will be especially important this time around because this guidance will not only incorporate the expectations from customer demand for the season, but it's also going to incorporate Amazon's management's best guess into how they feel they can fulfill that demand. Logistics constraints and all of that will be incorporated into this fourth-quarter guidance, so that's going to be important to watch. Then you're going to want to look at its two more profitable segments.
The AWS, which is Amazon Web Services, the Cloud segment, and advertising sales growth, which has been accelerating at a rapid pace over these last four quarters. Started out at 40 percent growth, and then jumped to 50 percent, and then 60, and then in the most recent quarter, it increased by 89 percent from the same quarter the year before, so advertising sales are jumping for Amazon. Interestingly, these two segments, even though they make up just about 10-15 percent of overall revenue for the company, they bring in close to 55 percent of operating income for the company, so they pack a big punch. It's going to be important to watch those trends continue to grow.
Lastly is the fulfillment, and logistical bottlenecks, and rising costs, and all of that that's going on for Amazon. Amazon has done a pretty incredible job in hiring. Over this last year, they've added about 450,000 employees, so they've got now over 1.3 million employees across their network, which is impressive considering the battle for employees that's been going on over this last year. Now, management highlighted that they were able to get employees, but that wasn't without cost, so they've been paying for that privilege to be, and they're still not adequately staffed, and they are still paying. They're paying higher wages, they're paying bonuses for hiring, they're paying tuition costs. I'm sure maybe some of our viewers have noticed that Amazon announced they're paying tuition costs, so they have a mix of compensation benefits that they're offering to potential employees to attract them. It's been somewhat working, but that's been pressing on profits, and that's partly why you see earnings-per-share declining by 27 percent, even though revenue is increasing by 16 percent.
Brian Withers: That's actually a great point, Parkev. The number you threw out of the employees that they've added this year is just absolutely mind-blowing. I don't know how many companies in America have 450,000 employees, and that's just what Amazon added this year. [laughs] That is incredible. Amazon took this upon themselves a number of years ago, they've always done this on the warehouse side, but they've taken out over more and more of the fulfillment from the delivery from the distribution center to your door, and now they do most of that themselves. They have their own planes, they have their own trucks, over-the-road 18-wheelers, and trucks that drive around your neighborhood, and delivery folks who drop that off to your door. When the volume ramps up for Amazon, they're going to be the only ones on the hook because they do most of that fulfillment themselves now.
Parkev Tatevosian: Management has not been shy or hesitant to invest in their network and improve the service for customers. Like they said, they're are willing to invest in order to improve the customer experience, however, it is impacting earnings in the near term.