E-commerce giant Amazon (AMZN -2.78%) is scheduled to report fiscal 2021 fourth-quarter earnings on Feb. 3. The company has done an excellent job fulfilling the surge in customer demand since the pandemic onset.
Despite economic reopening gaining momentum, demand remains strong at Amazon. When it reports fourth-quarter earnings results that include the holiday shopping period, revenue growth will be of particular importance given how aggressively Amazon is spending on capacity.
Amazon is investing in its team
In its third-quarter ended Sept. 30, 2021, net sales increased by 15% from the same time the prior year. That's a significant deceleration from the 37% revenue growth Amazon put together in 2020, but that was during the more acute phase of the pandemic when brick-and-mortar stores faced temporary closures and consumers were less willing to venture outside. The fact that Amazon is still growing sales by double digits from the already elevated levels is impressive enough.
"In the fourth quarter, we expect 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—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season," CEO Andy Jassy said in a third-quarter release. "It'll be expensive for us in the short term, but it's the right prioritization for our customers and partners."
Indeed, Amazon's forecast for fourth-quarter revenue calls for year-over-year growth between 4% and 12%. Meanwhile, the guidance for operating income is between $0 and $3 billion. Even the top end of the operating income range would be a significant drop from $6.9 billion in Q4 2020.
Part of the reason for the decrease in profitability is the additional costs. At the end of the third quarter, Amazon had 1.468 million employees, compared to the 1.125 million it had the same time the year before. And Amazon is paying higher wages, too. According to Amazon, job seekers in the U.S. can get offers from Amazon for an average starting pay of $18 per hour, sign-on bonuses of up to $3,000, and an additional $3 per hour depending on shifts. The generous pay package for entry-level employees explains why Amazon has hired so many while other businesses complain of shortages. That being said, Amazon is taking a hit in the short term that other firms are unwilling or unable to handle.
What this could mean for Amazon investors
Analysts on Wall Street expect Amazon to report revenue of $137.7 billion in Q4 and earnings per share of $3.74. If it hits the revenue estimate, it would be an increase of 9.7% from the year before, and above the midpoint of the projection that management gave for Q4.
Amazon's stock is down a little over 10% since its last reported earnings, the market undoubtedly unimpressed by the spending splurge. If Amazon reports better-than-expected sales and profits, it could be the catalyst that reverses the downward trend.