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Amazon - top and bottom line miss expectations, weaker outlook

Third quarter net revenue rose 15% to $127.1bn, with a stronger US dollar causing a $5bn headwind...

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Third quarter net revenue rose 15% to $127.1bn, with a stronger US dollar causing a $5bn headwind. Sales declines in the International segment were more than offset by rises in North America and Amazon Web Services (AWS).

Operating income fell from $4.9bn to $2.5bn, while costs accelerated faster than revenue, up 17.6% to $124.6bn.

Both revenue and profit were lower than analysts expected.

AWS saw sales rise 27% to $20.5bn, with operating income up from $4.9bn to $5.4bn. Sales in the advertising services division grew 25% to $9.6bn.

There was a free cash outflow of $3.6bn over the quarter, compared to an outflow of $7.4bn the prior year.

Fourth quarter revenue is expected between $140.0-$148.0bn, with operating profit between $0-$4.0bn.

The shares fell 12.7% in after-hours trading.

View the latest Amazon share price and how to deal

Our view

Third quarter results marked somewhat of a turning point for investor sentiment. The group missed analyst expectations on the top and bottom line, with fourth quarter forecasts looking weaker than we'd hoped. It seems broader consumer and business uncertainty, in the face of higher interest rates and inflation, has finally hit home.

Amazon's core e-commerce business is still undoubtedly king of the realm, but pressures are mounting. It's no secret Amazon went too big too soon on its expansion plans. It's had to put the brakes on, and then some, to try and get costs back under control. Unfortunately, the results of the about turn on spending aren't finding their way into the cost line yet, with costs soaring 18% over the quarter. That's weighed heavily on margins over the last year.

Longer term, its services we're excited about, which includes things like Prime, AWS (more on that later), and the group's advertising arm. It's been impressive to see the latter making progress even as some of the industry's greats warned that ad spend was starting to run dry. It's really saying something that Amazon's side hustle is thriving in this climate. Troves of data footprints and millions of customers ready and willing to click buy are a marketer's dream.

For now at least, though, AWS's broad shoulders are essentially carrying the group's profit line, it being the only profitable business segment this year. It was disappointing to see revenue growth at AWS dip below the all-important 30% figure we'd become accustomed to seeing. Weakness in this area suggests enterprises may be considering where to allocate capital. Upgrading cloud tech given such an uncertain backdrop could be something that gets kicked down the road. Looking at the bigger picture though, the strength of 27% revenue growth and a 26% operating margin, in a tough environment, shouldn't be dismissed.

Ultimately, the trove of challenges from a weaker consumer to costs running high have weighed on analyst's forecasted earnings, which have come down around 27% so far this year. That's kept the valuation, on a price to earnings basis, somewhat steady. That's despite a drop in company value in excess of 30%.

And so, the group still trades at close to 60 times expected earnings. We think that's largely a reflection of the prospects for AWS, and there's no denying that, plus other services areas, have huge growth potential. But with the e-commerce arm under serious pressure, there could be rocky times ahead.

Amazon key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Senior Equity Analyst

Matt is a Senior Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors. He is a CFA Charterholder and also holds the Investment Management Certificate.

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Article history
Published: 28th October 2022