Shares of tech giant Amazon (NASDAQ: AMZN) fell close to 7% on Friday after the company forecasted lower-than-expected sales for Q4 of 2022. It means AMZN stock price is now down 45% below all-time highs, valuing the company at a market cap of $1 trillion. Shares of the tech behemoth are now trading at the lowest levels since April 2020.
In Q3 of 2022, Amazon reported revenue of $127.1 billion, an increase of 15% year over year. Comparatively, Wall Street forecast Amazon’s Q3 sales at $127.45 billion. Its adjusted earnings per share stood at $0.28 compared to estimates of $0.01. In the year-ago period, Amazon reported earnings of $0.31 per share. Its bottom line in Q3 was driven by a pre-tax valuation gain of $1.1 billion due to Amazon’s investment in Rivian (NASDAQ: RIVN).
Amazon estimates revenue in Q4 to range between $140 billion and $148 billion, below consensus forecasts of $155.15 billion. The results of the e-commerce leader capped off a rocky week for big tech, most of which missed estimates amid a challenging macro environment.
Let’s see what impacted Amazon sales in Q3 of 2022.
Amazon Web Services reports slower-than-expected growth
In Q3, Amazon’s cloud business, also called Amazon Web Services, reported revenue of $20.5 billion, an increase of 27.5% year over year. But sales were lower than the $21.1 billion forecast by Wall Street. The cloud business now accounts for 16% of total sales, which rose by 33% in the June quarter. It was the slowest top-line expansion for AWS since Amazon began reporting on the finances of this business.
Launched in 2006, AWS accounted for 39% of the cloud infrastructure market at the end of 2021, compared to a 41% share in 2020. AWS competes with other tech titans, including Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG)(NASDAQ: GOOGL), in the public cloud segment, both of which gained market share in 2021.
The operating income for AWS stood at $5.4 billion, below estimates of $6.37 billion. Here, the operating margin contracted to 26.3% in Q3, compared to 29% in Q2. Further, Amazon ended Q3 with an operating income of $2.53 billion, indicating its other segments were unprofitable.
The company attributed wage inflation and higher energy prices as headwinds to its operating income in 2022.
Similar to most other growth companies, Amazon is likely to slow the pace of hiring across verticals. Sales growth for Amazon is decelerating, which will impact financials in the next 12 months.
What next for AMZN stock price and investors?
After years of double-digit growth rates, Amazon expects sales to grow between 2% and 8% in Q4. The guidance also expects a strong U.S. dollar to impact profit margins by 460 basis points as Amazon forecast operating income between $0 and $4 billion compared to $3.5 billion in Q4 of 2021.
Investors are worried about Amazon’s extremely low profit margins as the company continues to sacrifice the bottom line for revenue growth. But despite generating almost $486 billion in the last 12 months, it is struggling to post a consistent profit.
In Q3, its comprehensive net income stood at $500 million while free cash flow was a negative $6.5 billion. Its net liabilities stood at $160 billion, which means it should increase its cash flows by a significant margin to meet debt obligations.
Amazon sales are forecast to grow by less than 10% year over year to $512 billion in 2022 and by 15% to $590 billion in 2023. While earnings might fall from $3.24 per share in 2021 to $0.03 per share in 2022, they might improve to $2.26 per share in 2023.
We can see AMZN stock is valued at less than two times forward sales which is not too steep. Analysts remain bullish and expect shares to rise by 65% in the next 12 months.