Internet king Amazon (AMZN 3.43%), like pretty much all retailers, is feeling the heat of supply chain challenges. Its third-quarter earnings were a rare miss on expectations and the short-term outlook looks grim. Fortunately for investors, the market didn't take the news too badly, and the stock only fell about 4% after earnings were released.
The worst news in the report was the fourth-quarter outlook for operating income, which is expected to be between zero and $3 billion. That would be a huge letdown. But should it scare investors?
Image source: Amazon.
Troubles in Amazon land
Amazon has enjoyed years of high growth, and it had a habit of beating internal sales and earnings expectations even before it became an indispensable part of life last year. But that came to a sad end in the third quarter, when sales growth came in 15%. That was still the high end of guidance, which expected between 10% and 16% sales growth. Operating income of $4.9 billion was also on the high end of the expected $2.5 to $6 billion.
In other words, growth slowed down, but there were no surprises. Also unsurprisingly, Amazon Web Services (AWS) remained strong, growing 39% year over year.
The situation Amazon finds itself in is not specific to the company. Management cited "labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs" as weighing on the bottom line, both in the third and projected fourth quarters.
Amazon is going all out as it enters the highly anticipated holiday season, which is typically its highest-grossing quarter. As goods become more expensive to produce and market, courting customers could become aggressive. Amazon already rolled out early Black Friday deals back in the beginning of October, and it expanded same-day delivery service to nine new locations, for a total of 15.CEO Andy Jassy said, "It'll be expensive for us in the short term, but it's the right prioritization for our customers and partners."
Management expects sales to grow between 4% and 12% in the fourth quarter, an even sharper slowdown from the Q3 numbers, for a total of $130 to $140 billion. Keep in mind that that's on top of a 44% increase last year.
Operating income, however, is expected to be between zero and $3 billion, after $6.9 billion last year. AWS typically accounts for around half of total operating income, and it grew 38% in the third quarter, while the international segment posted a $900 million operating loss. That means in the fourth quarter, non-AWS operations are likely to post an operating loss as well.
Should you be scared?
Jassy is calling this short-term pressure in favor of long-term stability and opportunity. As the situation eases and Amazon holds its place as the leader in e-commerce, delivering what customers want, how they want it, Amazon will be well-positioned to increase profitability again. In the meantime, AWS is carrying it through.
The company's using its cash to increase its dominance, enter new markets, and launch new services, such as "try before you buy" fashion packages and new stores featuring its Just Walk Out cashier-less technology. These are the kinds of innovations that gave it AWS (which Jassy pioneered), and they're strong investments in Amazon's future.
Investors may have to hang on tight for a little while, but that's happening across the broader market for retail stocks. There's still plenty of opportunity for Amazon and its shareholders.
