Coverage: Amazon stock falls after disappointing earnings

Amazon.com Inc.’s second quarter earnings misses Wall Street estimates by a large amount, causing its stock to fall in after-hours trading after it rose in anticipation of the results.

Troy Wolverton of Business Insider had the news:

The company’s earnings missed analysts’ forecasts by more than a dollar a share. It also offered a disappointing outlook for the third quarter.

Investors sold the stock on the news. In recent trading after the bell, Amazon’s stock was down $29 a share, or nearly 3%, to $1,017.00.

The company reported on Thursday:

• EPS (GAAP) of 40 cents a share. Wall Street was expecting $1.42 a share, according to Bloomberg. In the year-ago period, Amazon earned $1.78 a share.
• Revenues of $38 billion. Analysts were expecting $37.2 billion. Amazon posted sales of $30.4 billion in the second quarter last year.
• Guidance: For the third quarter, Amazon expects to post revenue of between $39.25 billion and $41.75 billion. It expects its operating results to range from an operating loss of $400 million to an operating profit of $300 million. Assuming the company’s nonoperating income and expenses stay about the same — and depending on its allocation for taxes — that guidance implies that Amazon expects its bottom line for the period to come in at between a nearly $1-per-share loss to a profit that’s well shy of a $1 a share. Before Amazon’s report, Wall Street was forecasting that Amazon would earn $1.13 a share on $39.97 billion in sales in the period.

The company’s sales were boosted by results from its services business, most notably its AWS cloud-computing business. Compared with the year-ago period, AWS’ revenue was up 42% to $4.1 billion. Amazon’s overall service revenues also rose 42% to $13.2 billion. The company’s total revenue grew 25%.

Jeffrey Dastin and Rishika Sadam of Reuters reported that Amazon spent money investing in its business:

“Q3 is generally a high investment period,” Chief Financial Officer Brian Olsavsky said on a call with reporters, citing spending on fulfillment and hiring to prepare the company for the Christmas holiday rush. He added, “Our video content spend will continue to grow, both sequentially and quarter over quarter.”

Indeed, investing in faster shipping and video has become a refrain of sorts for the company. While some expected Amazon’s spending in these areas – stepped up since last year – to ease, the company is plowing ahead to reinforce its fast-shipping club Prime.

Olsavsky said video content included with Prime membership has helped Amazon retain subscribers and persuade those on a free trial to sign up for $99 per year in the United States. A cornerstone of the company’s strategy, Prime encourages shoppers to buy more goods, more often from Amazon.

Subscription sales including Prime fees rose 51 percent in the second quarter to $2.2 billion. Cowen & Co analysts have estimated that more than 50 percent of U.S. households will have Prime membership by the end of 2017.

Kevin Kelleher of VentureBeat noted Amazon’s international expansion:

Amazon has been expanding into countries like India, which has been taking its toll on margins. The operating loss of its international operations rose more than fivefold to $742 million, while international revenue rose by only 17 percent. Revenue in North America, by contrast, rose by a more robust 27 percent.

In a call with analysts to discuss earnings, CFO Brian Olsavsky said some of the higher costs are coming because Amazon is quickly rolling out to international Prime members the same features that it took years to build out for North American subscribers. “The North America segment is a little bit further along in terms of the Prime membership growth curve,” he said. “So, in some cases, we’re giving the benefits a little bit earlier in the cycle for international customers.”

Amazon said a 42 percent increase in headcount in the quarter drove up costs, with much of the hiring coming in software engineers and sales staff for AWS and advertising. Expenses are also increases to expand the company’s fulfillment centers, to build cloud infrastructure that can meet rising customer demand, and to bring on new streaming-video content — all areas of increased investment Amazon has warned of in the past.

In its earnings statement, Amazon glossed over a topic that has been a big focus among investors: its planned $13.7 billion purchase of Whole Foods Market. Since announcing the proposed transaction, Amazon has seen its stock rise by 8.3 percent and Whole Foods’ by 26.4 percent. Asked for an update, Olsavsky simply repeated that Amazon is looking forward to the merger. “We think they’re very customer centric, just like us,” he said.