Amazon Misses Wall Street Profit Estimates Sending The Stock Tumbling

On Thursday, Amazon.com, Inc. AMZN reported its third quarter earnings. Although the company has slightly exceeded Wall Street estimates on revenue, it has missed the estimates on profit, causing its stock to drop as much as 8.6% after the earnings were announced. "Oh, how the mighty have fallen" is the appropriate quote to in this scenario as this the first time in two years that the e-commerce giant's earnings have indeed fallen.

Earnings Report

Third quarter sales went up 26% amounting to $70 billion and this is great considering that the same quarter of 2018 had $56.6 billion. However, although Amazon Web Services again powered the company's bottom line as it is responsible for 13% of its total revenue, its growth has slowed down again and missed analyst expectations as it was below 40%, dropping further from 37% in the previous quarter. Last year's third quarter had a 46% bump whereas this one was only 35%, which is the lowest growth rate in more than five years.
Cloud investments eating up profits

However, this segment is still growing faster than the parent company as a whole as its operating income made about 71% of the company's overall operating profit. So the question is why have profits have fallen so sharply? Well, mostly due to the fact that shipping costs have risen and that the company is investing heavily in new cloud products and data centers around the world, all of which are eating up its profits. Its rival, Microsoft, also just reported its earnings and showed that Azure's revenue rose at an impressive year-on-year rate of 59% during its last quarter. It remains to be seen whether AWS or Microsoft will end up getting the $10 billion contract to build the Pentagon's cloud infrastructure.

More On Those Shipping Costs

The company's shipping costs increased 46% year-over-year in this record to a record figure of $9.6 billion. This is more than a half-billion dollars comparing to the amount they spent in a year ago, and during a busier season. This is part of the company' strategy to beat competition as it is now offering its Prime members free next-day delivery even for products priced below $5. Interestingly, in 2018 is when the company cut on hiring due to absorbing the acquired Whole Foods' workforce and now, they added 100,000 employees just during this quarter, which according to many analysts was the most surprising figure in the release.

Competitors

As for the cloud infrastructure, besides Microsoft Corporation MSFT, there's Alphabet Inc GOOGL, Alibaba Group Holding Ltd BABA that fortunately has net cash considering its heavy debt load, IBM IBM that is promoting AI-based business intelligence platforms and Oracle Corporation ORCL who was just named a leader in leader in translytical data platforms by Forrester Research due to the platforms' perks and ease of use.
Target Corporation TGT is literally firing on all cylinders right now as Amazon already forced them to ‘reinvent and redesign' its sales process and stores, but Amazon's lower cost shipment will be hard, if not impossible to beat.

On the other hand, CVS Health Corp CVS is focused on the health segment as recently the company hired a former Fitbit executive to create consumer-focused health products. It is also creating HealthHUBs where customers can access digital health tools and shop a wider inventory of products. All of this as a counter-hit to Amazon who bought the online pharmacy PillPack last year and announced it will join forces with JPMorgan Chase & Co JPM and Berkshire Hathaway to provide healthcare insurance and telemedicine services to employees. No doubts that Amazon is creating a lot of trouble to its competitors.

Outlook

Amazon is investing heavily in cloud products. And this is a company that has historically not been afraid to sacrifice profits for growth and the good news is that it is still leading the cloud market. But its moves also grab attention of regulators, lawmakers and climate change activists. It was less than a month ago that the company was forced by its employees to pledge to zero emissions. The company was ambitious even in that segment by setting its goal 10 years ahead of the Paris Climate accord that was decided upon in 2015.

The company plans to achieve this by purchasing 100,000 electric delivery trucks that are expected to be on the road by 2022. It will also continue investing to preserve nature and base 80% of its operations on renewable energy by 2024. But, the new move that includes shipping a shampoo or a tooth brush for free will surely be liked by consumers but will also likely undermine confidence in the company's green initiatives. Especially if this strategy results boosts up demand, can emissions really be lowered?

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