What happened

Shares of Amazon (AMZN -0.34%) stock declined by 4% through 10 a.m. EDT Friday morning after the e-commerce giant missed expectations for sales and earnings in the third quarter -- and announced weak guidance for the fourth quarter to boot.

Heading into the fourth quarter, analysts had forecast Amazon would report an $8.92-per-share profit for Q3, on sales of $111.6 billion. Last night, Amazon reported earnings totaling only $6.12, and its sales came in at $110.8 billion.  

Big red arrow going down over a stock chart.

Image source: Getty Images.

So what

The news wasn't all bad -- far from it! Although sales "missed estimates," they still grew 15% year over year. Still, the scale of the decline in Amazon's profitability was kind of staggering. Net profit declined by 50.5% year over year. And even worse, Amazon noted that free cash flow for the quarter flipped from positive $901 million a year ago to negative $8.4 billion in Q3 2021 as Amazon massively ramped up capital investment, spending $15.7 billion in the quarter.  

Amazon noted that over the past 12 months, however, its trailing free cash flow is still positive -- $2.6 billion. But even that number was way down from the $29.5 billion in cash Amazon generated for the trailing 12 months ended Sept. 30, 2020.

Now what

Commenting on the results, new Amazon CEO Andy Jassy explained that "when confronted with the choice between optimizing for short-term profits versus what's best for customers over the long term, we will choose the latter."

That was certainly the case in Q3. Amazon couldn't have sacrificed "short-term profits" much better if it had carried its cash out front on forklifts and set it on fire!

But as the CEO argues, "extraordinary investments across our businesses" were necessary "to satisfy customer needs" during the pandemic. And those investments are bearing fruit. "We've nearly doubled the size of our fulfillment network since the pandemic began," Jassy said.

The problem is, the spending isn't done yet. Amazon now expects "to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs." Amazon now forecasts that sales growth will slow even further in Q4, to a range from $130 billion to $140 billion -- all numbers below the $142 billion Wall Street forecast. And while operating profits in Q4 could be as high as $3 billion, they could also be as little as $0, warns the company.

No wonder investors are upset: The biggest and best e-commerce company on the planet just warned that it might barely break even next quarter.