What happened
Shares of Amazon (AMZN -1.65%) finished down 9% last month, according to data provided by S&P Global Market Intelligence. Disappointing fourth-quarter guidance in the third-quarter earnings report was the main reason for the stock's decline, but there were a number of other news items showing the company shifting into cost-savings mode as it announced hiring freezes or even full-on closures of some smaller divisions.
As you can see from the chart below, the stock tracked with the S&P 500 for most of the month but then diverged sharply when its earnings report came out.
So what
Throughout October, there were a number of signs that Amazon was facing strengthening headwinds. Its decision to hold a second Prime Day, called Prime Day Early Access, seemed to be evidence that the company needed to move inventory ahead of the holiday season.
Over the course of the month, a number of news reports showed the company taking steps to rein in costs by implementing hiring freezes and laying off staff in some of its peripheral businesses. The company has frozen hiring or scaled it back in large businesses like corporate retail and AWS, and said it closed Fabric.com and robotics start-up Canvas. It also laid off of half of its staff at Amp, its live radio project.
The big news last month and the reason the stock plunged 7% on Oct. 28 was that the company expects revenue to increase just 2% to 8% in the fourth quarter. Though that includes a foreign currency headwind of 460 basis points, the guidance signals that this will be the slowest-growth holiday quarter in the company's history.
Like its FAANG stock peers, the company cited macro headwinds for the slower growth, but Amazon may also be reaching a point where it's too big to put up the kind of growth numbers that investors are used to as revenue is set to top $500 billion this year.
Now what
In spite of the weak growth in the fourth quarter, the stock still holds promise. Amazon Web Services continues to deliver strong profitable growth, and the company should see overall profitability improve as it reins in costs and leverages its fixed-cost assets like its warehouses and data centers.
Barring a crushing recession, profitability should improve next year as the company right-sizes its cost structure and continues to grow high-margin businesses like AWS and advertising. Though investors have soured on the stock with shares down nearly 50% from its peak last year, the sell-off could present a buying opportunity as Amazon still has a number of valuable competitive advantages.
