Amazon (Amazon Stock Quote, Chart NASDAQ:AMZN) may have failed to deliver on its third-quarter revenue projections but analysts seem to be taking the miss in stride, saying the e-commerce giant will continue to be a money-making powerhouse for the foreseeable future.
Shares of Amazon dropped seven per cent in trading on Friday as investors reacted to a Q3 report that came up lighter than expected on revenue at $56.6 billion versus the consensus estimate of $57.10 billion, still a 29 per cent year-over-year increase. At the same time, the company posted better-than-expected EPS at $5.75 per share versus the Street’s $3.14. (All figures in US dollars.)
CEO Jeff Bezos said that the company’s marketplace for business customers was a quarter highlight.
“Amazon Business has now reached a $10 billion annual sales run rate and is serving millions of private and public-sector organizations in eight countries,” Bezos said.
The quarter also came with 123 per cent growth in Amazon’s advertising segment, along with a 46 per cent growth in its AWS cloud computing segment.
Growth in those high-margin businesses should be the takeaway, says Tom Forte, senior research analyst for DA Davidson & Co. who spoke to CNBC.
“When you consider that the profitability was very good in the September period, that gives me more confidence in their ability to offset higher wages with their cloud computing, advertising and third-party retail high margin efforts,” said Forte.
“I definitely think that the profitability on cloud services, on third-party retail and on advertising gave them the confidence that they could raise labour costs,” Forte added. “We still think that raising the minimum wage means that Amazon intends on expanding their physical footprint in retail, potentially a lot more than today’s three Amazon Go stores.”
Fellow FAANG member Alphabet also reported its third quarter earnings on Thursday and, continuing the theme, beat expectations but came up short on its top line, with revenue of $33.7 billion for Q3.
Last month, Amazon passed Oath and Microsoft as the third-largest US advertiser in terms of revenue, according to an eMarketer report. At 4.1 per cent of digital ad spending, Amazon is still miles behind Google and Facebook who together control 57.7 of US advertising spending.
“Amazon is a very strong company in a great position,” says Kevin Landis of Firsthand Capital Management to CNBC. “We’re trying to gauge just how much upside there is in the advertising business but it looks like there’s a lot of opportunity there.”
Disclosure: Jayson MacLean and Nick Waddell of Cantech own shares of Amazon