Amazon (AMZN) Q3 Earnings: What You Need to Know
Last week, Amazon (AMZN) - Get Free Report reported third-quarter financial results that made Wall Street bearish (or at least considerably less bullish) about the stock’s future. The Seattle-based company presented not only weak e-commerce results, but also slightly lower-than-expected growth for its cloud computing arm, Amazon Web Services (AWS).
As a result, Amazon's stock dropped 13% the day following the annoucement, hitting a $98 low and breaking the $100 limit for the first time since April 2020.
But despite lowering their price targets, most Wall Street analysts still consider the stock a buy. Could this be a good opportunity for acquiring some Amazon shares?
Figure 1: Amazon (AMZN) Q3 Earnings: What You Need to Know
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Amazon's Inconsistent E-commerce Business
For several quarters, Amazon's e-commerce sales results have been weak compared to its highly profitable AWS business.
In the most recent quarter, Amazon's North America online retail segment brought in nearly $79 billion in revenue (implying an impressive 20% growth).
Still, it presented an operating loss, in contrast with the 2021 third quarter’s small profit.
However, the real miss was in Amazon's international segment. The company reported an even higher operating loss compared to last year’s.
“It was mostly in international where we saw the biggest impact, and we think that is tied to a tougher recessionary environment there," said CFO Brian Olsavsky.
"Compared to the U.S., it's worse in Europe right now. The Ukraine war and the energy crisis issues have really compounded in that geography.”
Still, I wouldn’t bet on Amazon’s international segment becoming a revenue driver for the company in the short run (maybe not even for the long term).
It's true that, foreign currency impacts aside, the international segment grew its net sales by 12%.
But net sales were flat for the previous three quarters and have been showing nothing but operating losses. This segment simply seems too inconsistent.
AWS's Decreased Profit Margin
The Amazon Web Services segment remained the star of night. Amazon’s cash cow has grown its net sales from $16 billion to $20 billion year over year. Operating profits also increased, from $4.8 billion to $5.4 billion.
AWS’s secret sauce for being able to grow sustainably amid a potential recession could be the potential recession itself: Amazon's cloud arm offers its clients the possibility to turn a fixed cost related to data center’s processing power into a variable and lower expense. In times when cash is running short, companies look to cut their costs.
Still, AWS’s profit margin dropped from 30% to 26%. According to CFO Olsavsky, this comes mostly from Amazon’s stock-based compensation line and energy costs, because both wages and energy prices increased in 2022.
“We did see a deceleration or a drop in operating margin sequentially quarter over quarter. The broad disclaimer on AWS margins is that they will fluctuate over time as we balance investments versus renegotiating pricing with the long-term customer commitments, all as headwinds to the business, offset by increasing productivity and efficiencies in our data centers, which drive profitability,” Olsavsky explained.
Is AMZN a Buy?
Wall Street thinks Amazon is still a buy. Of the 33 analysts covering the stock listed on TipRanks, 32 rate the stock as overweight. The remaining analyst believes it's a hold.
Still, the third-quarter earnings have shaken the Amazon Bull Club: Before the earnings conference, the average price target was $170; after the event, it dropped to $140.
As Amazon remains well positioned in two largely expanding fields — online retailing and cloud computing — this could be an interesting entry point for investors who wish to invest in Amazon for the long run.
However, for investors who aren't convinced yet, there will probably be new opportunities. Because the company's guidance for fourth-quarter earnings was rather disappointing, Amazon's stock turnaround might have to wait another year or two.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)
