Amazon's (AMZN 1.47%) third-quarter earnings report was decidedly un-Amazonian.
The tech giant said that revenue growth slowed to just 15% in the third quarter to $110.8 billion, missing expectations, while operating income fell by 21% to $4.9 billion. That revenue growth rate represents Amazon's slowest pace since 2015.
The company had warned that top-line growth would fade as it lapped the pandemic surge and as the economy normalizes, but investors still seemed unprepared for the slowdown -- the stock was down as much as 5% on Friday morning.
Amazon's fourth-quarter guidance also showed that the challenges it's facing with supply chain disruptions and labor shortages are only getting worse. Management called for just 4%-12% revenue growth for the fourth quarter, though that period will lap the Prime Day shopping holiday, which was held in October last year.
The third-quarter numbers also revealed that Amazon's first-party sales barely grew, up just 3%, and the company actually lost money outside of Amazon Web Services (AWS), its cloud-computing juggernaut. In its North America segment, which is mostly e-commerce but includes high-margin businesses like advertising, it brought in $880 million in operating profit, but it lost $911 million in its international segment for a combined loss of $31 million between both segments. While AWS remains a growing cash machine, the upshot of the quarter is that Amazon, and especially its e-commerce operations, now looks more vulnerable than it has in a long time.
Image source: Amazon.
Excuses, excuses
CFO Brian Olsavsky pointed to a litany of headwinds on the earnings call. Among them were supply chain disruptions, inflation in materials and services costs, and labor shortages, which he said was the biggest constraint the company faced. As a result of the labor shortage, Amazon was forced to hike average starting wages to over $18/hour and offer some new frontline workers sign-on bonuses of up to $3,000.
It also had to shift its inventory to alternate warehouses that were adequately staffed, leading to higher transportation costs. Higher labor costs, labor-related productivity losses, and cost inflation added to 2 billion in operating costs in the third quarter, and the company estimated it would lose another $4 billion in operating income in the fourth quarter because of those factors. Amazon's guidance called for between $0 and $3 billion in operating income for the fourth quarter, down from $6.9 billion in Q4 2020, indicating it expects to lose money on e-commerce again.
The macroeconomic environment is also impacting the company in other ways. It's been difficult for it to achieve the one-day Prime delivery that Amazon promised in 2019, as delivery speeds are still not back to pre-pandemic levels. The "Great Resignation," or the phenomenon of millions of Americans quitting their jobs to pursue other opportunities, also seems to be testing Amazon's labor relations, which has historically been its weakest link. Though a union drive in Alabama was defeated, another is brewing in New York, and the company has been trashed by employees repeatedly in viral videos on social media. A New York Times report found that Amazon's HR system is woefully overwhelmed and its warehouse workers on average stay on the job for less than a year, leading to the concern that the company is exhausting its pool of potential workers.
There's also the more existential issue that Amazon appears to be losing market share to its closest competitors. Most other e-commerce companies have yet to report third-quarter earnings, but Shopify (SHOP 2.63%), the software engine running more than 1 million online businesses, said its gross merchandise volume, or the total value of goods sold on its platform, increased by 35% in the third quarter, significantly outpacing Amazon. Shopify also has the luxury of not having to deal directly with labor shortages or supply chain woes since it's a pure-play tech company, which is a clear advantage at the moment.
A reality check
Amazon is still Amazon, and 15% growth on top of $96 billion would look great for almost any other company. But the glide path the company was on during the pandemic has come to an abrupt end. Amazon's fourth-quarter guidance implies that e-commerce revenue could decline, and that it's likely to lose money outside of AWS once again.
The company is still bullish on e-commerce and is investing for more growth next year, saying that business should accelerate by the second half of 2022. However, Amazon faces real risks in the labor market challenges, which show no signs of ebbing, in the rise of competitors like Shopify, and in its own labor force's backlash. Investors should keep an eye on those factors, especially the labor issues. After all, there's a reason Jeff Bezos singled out employee relations as lacking in his final shareholder letter as CEO.
Amazon still has a plethora of competitive advantages, and AWS shows no signs of slowing down. But if you're wondering why the stock has gone nowhere over the last year while the S&P 500 jumped 40% higher, the third-quarter report gives you a clear answer.
