Interactive Investor

ii view: rising costs weigh on mighty Amazon

29th October 2021 11:00

Keith Bowman from interactive investor

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Cost headwinds for retail sit alongside growth at its cloud computing business AWS. Buy, sell or hold?

Third-quarter results to 30 September 2021 

  • Net sales up by 15% to $110.2 billion (£80.4 billion)
  • Operating income fell 21% to $4.9 billion (£3.58 billion)
  • Earnings per share down 50% to $6.12

Guidance:

  • Expects Q4 sales of between $130 billion and $140 billion, giving year-over-year growth of 4% to 12%
  • Expects operating income of $0 billion to $3 billion compared with $6.9 billion in Q4 2020

Chief executive Andy Jassy said: 

“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter — and you can see that during every phase of this pandemic.

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labour supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritisation for our customers and partners.”

ii round-up:

Online retail mammoth Amazon (NASDAQ:AMZN) delivered both disappointing sales and outlook guidance as consumers returned to physical stores and rising freight and labour costs began to bite. 

Third-quarter revenue growth of 15% contrasted with the 37% achieved in the heavily pandemic driven corresponding period in 2020. Profit fell year over year and both sales and earnings per share missed analyst forecasts. 

Amazon shares fell by around 4% in after-hours US trading, leaving them up by around 80% since virus induced market lows in March 2020. Shares of eBay (NASDAQ:EBAY) are up over 150% in that time, while shares for Chinese online retailer Alibaba (NYSE:BABA) are down by just under 5%.

Operating profit for Amazon in the important fourth-quarter holiday period is now expected to come in at up to $3 billion. That’s down from $6.9 billion in the fourth quarter of 2020. Management also expects to swallow around $4 billion of additional costs linked to higher shipping costs and wages.

However, broker Morgan Stanley estimates that around a third of those expected cost increases will prove temporary given items such as staff bonuses. 

Away from retail, revenue for its cloud data or web services business jumped by 39% to $16.1 billion, as corporations globally continued to invest in IT networks allowing easier remote working for their staff.   

The figures marked only the second set of results under new chief executive Andy Jassy, the former head of its cloud computing business, following the stepping down of founder Jeff Bezos. 

ii view:

Amazon has given 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. The group’s cloud computing or AWS business also offers attractive growth potential. The latest quarterly revenue total of over $16 billion makes AWS a sizeable business in its own right.  

For investors, the emergence of economies from lockdowns is diluting the tailwind Amazon previously received during the pandemic. It faces tough comparatives at the same times as having to tackle supply chain challenges and increased costs. The debate over valuations is ongoing, while government concerns about the growing dominance of tech giants remain. 

But the core retail offering is now also accompanied by significant cloud and media businesses, and the valuation suggests that analysts still anticipate high growth. There could also be much more to come from its foray into food retailing. For now, and while some near-term caution looks sensible, further long-term growth looks to remain highly likely. 

Positives

  • Dominant position in online retailing
  • The Amazon Web Services (AWS) business is now a major global player

Negatives

  • The threat of increased regulation across many of its markets
  • Subject to tech valuation concerns

The average rating of stock market analysts:

Strong buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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