ii view: Holiday sale projections fall short at Amazon

Amazon shares retreat. Rising costs or an investment in delivery speed? 

Third-quarter results to 30 September 2019

• Net sales up by 24% to $70 billion
• Operating income down 13.5% to $3.2 billion
• Diluted earnings per share (EPS) down 26% to $4.23

Chief executive Jeff Bezos said: 

"We are ramping up to make our 25th holiday season the best ever for Prime customers — with millions of products available for free one-day delivery. Customers love the transition of Prime from two days to one day — they've already ordered billions of items with free one-day delivery this year. It's a big investment, and it's the right long-term decision for customers. And although it's counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfilment centres very close to the customer."

ii round-up:

Online retailing giant Amazon.com (NASDAQ:AMZN) reported what investors overall saw as disappointing third-quarter results. 

Although sales of $70 billion exceeded expectations, management projections for the critical fourth-quarter holiday period proved shy of forecasts. 

Rising costs in the wake of Amazon's push for one-day delivery for its Prime customers played its part in denting profit expectations, while some pulling of sales into the third-quarter given the introduction of higher consumption taxes in Japan is likely to have undermined fourth-quarter sales estimates. 

A 35% increase in revenue to $9 billion for its cloud and data storage business Amazon Web Services (AWS) also proved short of high analyst expectations. 

The share price fell by around 7% in after-hours US stock market trading. 

Nonetheless, broad progress was clearly evident. Free cash flow increased to $23.5 billion for the trailing 12 months, compared with $15.4 billion over the prior 12-month period. An all-new line up of Echo devices have been introduced, 20 new Fire TV products were previously announced, while General Motors (NYSE:GM) unveiled plans to integrate its Artificial Intelligence (AI) product Alexa into millions of its vehicles. 

ii view:

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is evidenced by phenomenal growth.  

For investors, a stock market value which can fluctuate around $1 trillion might suggest that the best of its growth is now behind it. But a forward price/earnings (PE) ratio of over 70 implies that investors and analysts anticipate much more growth to come. Like Microsoft (NASDAQ:MSFT) and Google parent Alphabet (NASDAQ:GOOGL), Amazon now competes to offer global corporations data server facilities.

Any slip-up in growth will be punished, of course, and, as with the other mighty US tech stocks, the debate about valuation is never far away from Amazon. But it is the market leader and streets ahead of the rest; it's why investors keep buying. The real test, however, will be how it copes with the next major economic slowdown.

Positives

• Dominant position in online retailing
• Amazon Web Services business now a major global player
• In voice recognition, Alexa dominates rivals Apple and Google

Negatives

• The threat of increased regulation across many of its markets
• Management succession risk – who might replace current CEO and founder Jeff Bezos?
• No current dividend payment

The average rating of stock market analysts:

Strong buy