Amazon shares take a hit on falling profits and weak guidance

Amazon saw its stock fall by as much as nine per cent after reporting a big drop in profit during the third quarter of the year – mostly down to it pumping money into shipping.

Profits fell from $2.9bn in Q3 2018 to $2.1bn this year, despite revenue leaping 24 per cent to $70bn from last year’s $56.6bn. As a result, Amazon’s earnings per share came in at $4.23, way below the over $4.60 expected by Wall Street analysts. The profit hit is largely down to the company pushing to offer one-day shipping to Prime members on more products and in more markets.

“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,” said Jeff Bezos, Amazon founder and CEO. “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 — it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

Amazon’s cloud computing division, Amazon Web Services, also fell slightly short of Wall Street predictions, coming in with sales of $9bn versus the expected $9.1bn. This represented a growth of 35 per cent from Q3 2018, but this showed slowly growth compared to last year’s 46 per cent.

Looking ahead to the fourth quarter, Amazon expects revenue of between $80bn and $86.5bn, representing a growth of between 11 per cent and 22 per cent over Q4 2018 but below Wall Street’s estimates. The company believes its operating income will fall to between $1.2bn and $2.9bn, from $3.8bn in 2018, falling well below analyst predictions again.

What the experts think…

Sophie Light Wilkinson, VP of marketing EMEA at Bazaarvoice
“This latest knock to shareholder confidence reflects a difficult quarter for Amazon during which stock has fallen by 13.4 per cent since its second-quarter earnings report in July.

While Prime video and its advertising services continue to balance out what has become a very diverse portfolio of businesses beneath the Amazon brand, trouble endures at its very centrepiece, the marketplace. Discontent over fake reviews persists with Facebook embroiled in the facilitation of private groups designed to extract five-star reviews from buyers duped into paying for “FREE!” product samples. It’s worrisome that such a large ecommerce platform has yet to cleanse itself of these bad actors, or offer a comprehensive product sampling option for sellers.

Other headlines about the marketplace have focused the conditions in its warehouses following recent high-profile incidents of workers moving to unionise. With Black Friday encroaching, Amazon has ramped up PR efforts, including TV spots in the UK. The sudden arrival of ‘Twitter ambassadors’ from Amazon’s warehouses highlights its understanding of the wider view consumers now take when they buy from a retailer and the importance of authenticity.”

Steve Gershik, chief marketing officer at inRiver
“For product marketers and merchandisers, Amazon’s investment in improving deliverability raises the bar for everyone who sells online. Consumers expect a seamless and frictionless buying experience, and expectations will only increase as a result, even as Amazon sacrifices short term earnings for long term customer loyalty and increased average order value.

In order to keep pace, brands need to focus on retaining loyalty by implementing an effective and profitable product experience, supported by accurate and consistent product information. Today, Amazon is the standard setter for product information, quality, customer service and logistics, but with competition fierce, adapting to changes in purchasing behaviour with the current market is the only way to drive maximum engagement and revenue.”

Hugh Fletcher, global head of consultancy and innovation at Wunderman Thompson Commerce
“While Amazon has seen its profit dip for another quarter, it is ultimately part of its long-term strategy to maintain its place at the top in the retail industry. As a fall in profits have been supplemented by its push for one-day delivery in North America, these short-term investments have put it in a strong position against its competitors. Keeping its position as the benchmark for service is vital for Amazon, even if in the short term it affects its profits. In fact, 72 per cent of customers in our recent survey said that they wished that all retailers and brands offered services like Amazon does. And with 62 per cent of customers wishing that they could buy all their products through one retailer, being number one in terms of service is vital to increase the probability that Amazon ends up as the one retailer that all consumers use.

“Amazon has played a hand in conditioning the future shopper to expect quick delivery – something many of its rivals cannot compete with. In fact, a fifth of 6-16-year-olds will never buy from somewhere that can’t deliver the next day and 83 per cent of children wish their purchases would arrive faster – so it has built the right foundations to continue its success with the next generation of shoppers. While its investment in infrastructure globally is proving costly, its dedication to staying ahead of its competitors will undoubtedly see Amazon leading the retail space for a long time.” 

Aaron Goldman, chief marketing officer at 4C Insights
“The ‘Other’ category which is primarily comprised of advertising revenue was a bright spot in Amazon’s Q3 earnings announcement with 37 per cent growth to $3bn. Amazon is quickly ramping up its advertising platform and tapping into search marketing budgets. Amazon has the unique ability to close the loop from purchase intent to sales and allow brands use that data for ad targeting and measurement. Advertisers using 4C to manage their Amazon Advertising campaigns increased their spend by more than 250 per cent year-over-year in Q3 2019 and we expect this growth to continue during the peak Q4 shopping season.”