Amazon: Profits Take a Backseat, but Important To Avoid Bad Habits

Written by: Nicholas Hyett | Hargreaves Lansdown

Amazon reported third quarter revenues of $110.8bn slightly behind market expectations despite rising 15% year-on-year. All division showed progress, but growth was particularly strong in AWS following a wide range of customer wins.

Operating profits came in at $4.9bn, a 21% decline compared to the same period last year. That was well behind the $5.5bn analysts had expected, as the group continues to invest heavily in increased fulfilment capacity in the US and internationally.

Amazon reported revenue growth across all three of its operating segments, although retail profits went backwards. North American sales rose 10.4% to $65.6bn, while operating profits of $880m were well behind the $2.3bn reported last year.  International reported sales of $29.1bn and an operating loss of $911m, that contrasts with $25.2bn and $407m profit reported last year respectively. Amazon Web Services (AWS) reported sales of $16.1bn, up 38.9%, and operating income of $4.9bn up 38.1%.

Total operating costs rose 17.8% year-on-year, with spending on Marketing, Technology & Content, General & Administrative and Fulfilment all out pacing revenue growth.

Capital expenditure rose 42.3% to $15.7bn. Together with a significant increase in inventories and payments due, that resulted in a free cash flow falling from a $901m inflow last year to a $8.4m outflow. As a result net cash, excluding leases, fell from $52.6bn at the start of the year to $28.9bn.

Fourth quarter sales are expected to be between $130bn and $140bn, between 4% and 12% ahead of the same quarter last year. Operating profit is expected to be between $0 and $3.0bn – compared to the $6.9bn reported in the same period last year.

Amazon shares fell 4.3% in early trading.

“While staying consistently in the black, Amazon has never been overly focussed on the bottom line. That willingness to invest in what the group hopes will be long term success at the expense of short term profits is on display again in these results.

Marketing expenses have risen nearly 50% year-on-year, and a whole host of other costs are also outpacing revenue growth as the group ramps up its capacity to meet increased customer demand and expectations. However, even in a company with Amazon’s track record, a sudden, unexpected reverse in margins can make investors jumpy.

We’re happy to give newly installed CEO Andy Jassy the benefit of the doubt for now. The group has a sizeable cash pile on hand to fund investment and newer products are still showing very steady growth. The relatively new advertising proposition grew something like 50% year-on-year. We also take comfort from the fact AWS is already showing rapid and profitable growth following investment earlier in the pandemic.”

Related: Alphabet: Another Quarter’s Strong Growth Leaves Behind a Brewster Problem