Amazon.com (NASDAQ:AMZN) was crashing by 10.9% on Thursday after the market close, as the online retailer reported lower-than-expected sales and earnings for the third quarter of 2014. Wall Street is showing no love for Amazon stock lately, and it looks like investors in the company should expect sustained volatility over the middle term. Let`s take a look at Amazon.com and the main takeaways from the latest earnings report.
Sales are strong, but may be slowing
Sales during the third quarter of 2014 came in at $20.58 billion, a 20.4% increase versus $17.09 billion in the third quarter of 2013. The number was near the high-end of the company's guidance of between $19.7 billion and $21.5 billion, but below Wall Street analysts' expectations of $20.84 billion for the quarter.
Management expects sales during the fourth quarter to be in the range of $27.3 billion to $30.3 billion, representing an annual increase of between 7% and 18% versus the same quarter in 2013. Wall Street analysts are, on average, forecasting $30.89 billion in revenues during the seasonally important fourth quarter, so forward sales guidance also came in below expectations.
The holiday quarter is crucial for retailers across the board, and Amazon is no exception. Based on 2013 figures, the fourth quarter can represent nearly 34% of total annual sales. Even if revenues come in near the top-end of the company's range guidance during the next quarter, this would represent a slowdown in growth versus the 20.3% increase in revenues that Amazon reported in the fourth quarter of 2013.
Amazon is generally considered a disruptive growth story, and many investors are willing to tolerate the company's lack of profitability, as long as sales continue growing at a considerable speed. Amazon's growth rates are indisputably strong for a company of its size; however, sales still came in below expectations, and this is probably the biggest reason for negativity in the recently released report.
The profits, or lack of profits
The company reported an operating loss of $544 million during the third quarter, which does not look terribly bad in comparison to its own guidance for an operating loss of between $410 million and $810 million. Earnings per share were below expectations, though. Amazon reported a net loss of $0.95 per share versus an average forecast for a net loss in of $0.74 per share.
Regarding operating results for the fourth quarter, management provided fairly wide guidance. The company expects operating results during the coming quarter to be between a $570 million loss and an operating gain of $430 million.
Wall Street analysts are, on average, forecasting a net gain of $0.67 per share during the fourth quarter. While Amazon does not provide earnings-per-share guidance, the operating-results guidance looks quite disappointing in comparison to Wall Street expectations.
Cash flows remain healthy
When reporting financial figures, most companies usually start with sales or earnings per share. Amazon, on the other hand, begins with discussing cash flows. This is consistent with the company's philosophy of prioritizing cash flow generation over profit margins.
Operating cash flows during the trailing 12-month period ended in September were $5.71 billion, a healthy increase of 15% versus $4.98 billion in the same period last year. Free cash flow increased to $1.08 billion versus $388 million 2013. It's important to note that figures for 2013 included $1.4 billion in capital expenditures for the purchase of corporate office space and property.
The business is clearly producing large and growing amounts of cash flows, while Amazon continues to reinvest most of that money for growth. This represents no substantial change in Amazon's performance or strategy, so cash flows were probably the bright spot in the report.
The bottom line
Amazon's net loss was wider than expected, but cash flows are still remarkably strong, so there is no big surprise there. Slowing revenue growth could be an important variable to watch, though, especially if numbers for the fourth quarter confirm a deceleration. Wall Street has been reacting with anxiety to negative news from Amazon.com during the last few quarters, and it seems like this latest earnings report will be no exception
Andrés Cardenal owns shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.