Amazon surprised investors with a big miss on earnings yesterday while the company's revenue was merely in line with predictions.
The e-commerce giant negatively surprised its investors expecting another successful quarter with a huge miss on earnings per share that dragged AMZN shares down more than 6% in after-hour trading. Amazon (NASDAQ: Amazon.com [AMZN]) reported earnings per share of $0.52, 200% higher than in the same period last year but miles away from the analysts' average prediction of $0.78 for the quarter.
Revenues could merely cover the Wall Street's estimate of $32.654, closing the quarter with $32.7 billion. Yet Q3 revenue performance was 29% better than that of year-earlier quarter, say the analysts. Net income was at $252 million this quarter. Following the quarterly results announcement yesterday, shares fell 6.2% to $764, reported the Financial Times. Throughout this year, Amazon shares jumped over 21%.
However, on other fronts Amazon managed to demonstrate some growth. Revenue from Amazon Web Services skyrocketed 55% this quarter and amounted to $3.2 billion which is the biggest year-over-year jump in sales. The operating margins of Amazon Web Services also substantially increased by a little over 31%. The impressive performance of AWS is coming from the several new products the company rolled out this quarter such as a new hybrid cloud service VMware Cloud and a decrease in the service's price, say the experts. This part of Amazon's business was the main driver of growth this quarter.
Another thing that Amazon praised itself on was its newly-developed virtual assistant Alexa that was among the main factors pushing the company's operating costs up 29%, says the Financial Times. Amazon CEO Jeff Bezos said that Alexa was taking on over 3,000 skills and was constantly improved by the engineering teams.
“Because Alexa’s brain is in the cloud, we can easily and continuously add to her capabilities and make her more useful — wait until you see some of the surprises the team is working on now,” Bezos said in a press release.
Amazon Prime is yet another growth driver for the company, say Consumer Intelligence Research Partners. This is an interesting metric to take into account as Amazon itself does not share the Prime membership numbers, so the estimate from CIRP is a good indicator to see a bigger picture, says USA Today. According to the research agency, there are approximately 65 million Prime members in the United States, meaning that slightly more than half of all American Amazon customers purchased the Prime subscription.
This number is 38% higher than the similar estimate from the Q3 of 2015 when only 47 million customers used Prime, reports USA Today. The experts add that Prime members are a lucrative segment as they spend $1,200 per year on average, as compared to a non-Prime customers who spend just $600 a year.
Too hard to keep up
But here comes the question: what made Amazon miss the earnings this quarter? Seeking Alpha's analyst Bill Maurer names several factors that worked against Amazon's earnings in Q3. First of all, the investors' expectations of Q3 earnings were too high to keep up with thanks to Amazon's top performance in the last two quarters. Even though this could explain the disappointment of investors, Maurer says that Amazon simply couldn't make as much progress this quarter as it did in the previous ones.
The analyst blames Amazon's international business to be the culprit. The company reported an operating loss of $541 this quarter, which is more than two times higher than that in the same period of last year ($208 million).
"While expectations were high given the last two quarterly beats, the company just didn't make as much progress this time around, with the international business moving from a help to a big hurt," the analysts wrote.
The second aspect that weighed the EPS down was Amazon's tax rate. This quarter, the company's effective tax rate amounted to about 46%, the highest tax rate level this year and almost double the Q2's result of 26%. The analyst says that even though it is not normally considered a serious threat to the quarterly performance, if Amazon had maintained the tax rate of Q2, earnings per share would have been $0.23 higher this quarter. And this alone could mostly compensate for the missed estimate.
Well, even though Amazon did not impress investors with earnings this quarter, it seems that the company is not preparing for any cost cuts in the upcoming holidays quarter and maintains a positive outlook:
“Looking ahead, Amazon's early sales estimates for the holiday quarter are calling for revenue growth of 25% over a year ago and the company has responded with plans to hire 120,000 seasonal workers (up 20% from last year) at a time when many bricks-and-mortar retailers are curbing their spending and hiring," said Motley Fool analyst Jason Moser.