On Friday, shares of Amazon (AMZN +1.21%) declined 6.8% following the e-commerce and cloud computing leader's release of its third-quarter 2022 results on the prior afternoon.
The company's quarterly revenue and earnings missed Wall Street's expectations. But the biggest reason for the stock's sell-off was likely management's weak guidance for the fourth quarter, which includes the big holiday period.
Here's an overview of Amazon's third quarter and guidance centered around six key metrics.
NASDAQ: AMZN
Key Data Points
1. Revenue grew 15%
Amazon's net quarterly sales grew 15% year over year to $127.1 billion, slightly missing the $127.5 billion Wall Street had expected. That result, however, was in line with the company's guidance range of $125 billion to $130 billion. Excluding the headwind from foreign-currency exchange, revenue increased 19% from the year-ago period.
Here's how revenue broke down by segment:
| Segment | Q3 2022 Revenue | Change YOY (Decline) |
|---|---|---|
| North America | $78.8 billion | 20% |
| International | $27.7 billion | (5%) |
| Amazon Web Services (AWS) | $20.5 billion | 27% |
| Total | $127.1 billion | 15% |
Data source: Amazon. YOY = year over year.
The international segment's underlying performance was much better than suggested by its 5% decline in year-over-year revenue. In constant currency, revenue rose 12%. In the last year, the U.S. dollar has gained much strength relative to other currencies, which is hurting the performance of Amazon's international business.
In constant currency, AWS's revenue grew 28%. The cloud computing business's growth has slowed but it's still robust. Last quarter, its revenue grew 33%.
2. Advertising was a bright spot, with revenue up 25%
Ad revenue is contained within the segment revenue (covered above), but it's getting its own category to draw attention to it.
Amazon's ad sales jumped 25% (and 30% in constant currency) to $9.5 billion. This would be a strong performance at any time, but it's really impressive at this time because many companies have been cutting back on their ad spending.
3. Operating income fell 49%
Operating income decreased 49% year over year to $2.5 billion, driven by inflationary pressures on input costs. This result was in line with Amazon's guidance range of operating income between $0 and $3.5 billion.
| Segment | Q3 2022 Operating Income | Change YOY |
|---|---|---|
| North America | ($0.4 million) | Result was $0.9 billion in the year-ago period. |
| International | ($2.5 billion) | Loss widened from $0.9 billion in the year-ago period. |
| Amazon Web Services (AWS) | $5.4 billion | 10% |
| Total | $2.5 billion | (49%) |
Data source: Amazon.
While the cloud computing segment's margin is still strong, it did contract, as reflected by the percentage growth of its operating income falling short of that of its revenue. This is likely at least in part due to the challenging macro environment.
4. EPS dropped an estimated 45%, excluding the Rivian stock valuation gain
Net income was $2.9 billion, or $0.28 per share, compared with $3.2 billion, or $0.31 per share, in the year-ago quarter. This result included a pre-tax valuation gain of $1.1 billion included in nonoperating income from Amazon's common stock investment in electric vehicle (EV) maker Rivian Automotive, which went public last November.
Excluding this gain, Amazon's earnings would have been an estimated $0.17 per share. (I use "estimated" because absent the Rivian stock valuation gain, the exact amount of income tax the company would have owed is not known.) This result fell short of Wall Street's estimate of adjusted earnings per share (EPS) of $0.21.
5. Operating cash flow declined 27%
Operating cash flow fell 27% year over year to $39.7 billion for the trailing 12 months. Free cash flow (FCF) was negative $19.7 billion for the same period, versus positive $2.6 billion for the year-ago period.
Operating cash flow is the best cash flow metric to follow. FCF can vary a lot based upon how much money Amazon is investing in growth initiatives.
5. Fourth-quarter revenue is expected to grow 2% to 8%
For Q4, Amazon guided for net sales in the range of $140 billion to $148 billion, which would equate to growth of 2% to 8% year over year. This guidance builds in an unfavorable impact of about 4.6 percentage points from changes in foreign exchange rates.
Going into the report, Wall Street was modeling for fourth-quarter revenue of $155.2 billion, so guidance came in notably lighter than analysts had been expecting.
Amazon (which doesn't provide earnings guidance) also expects that fourth-quarter operating income will be between $0 and $4 billion, compared with $3.5 billion in the year-ago period.
A solid quarter but guidance was somewhat disappointing
Amazon turned in a quite respectable third quarter given the headwinds from the macro environment (high inflation, recession concerns, and the continuing relative strengthening of the U.S. dollar).
However, fourth-quarter revenue guidance was somewhat disappointing. That said, long-term investors should keep a couple of things in mind:
- The challenging macro environment won't last forever.
- It's likely management is being conservative with its guidance.
