AMZN Amazon.com Inc

By Dana Mattioli 

Amazon.com Inc.'s profit machine sputtered again after more than two years of surging growth, weighed down by the tech giant's heavy investment into reducing shipping times for retail customers.

Amazon on Thursday said its third-quarter profit fell 26% from a year ago to $2.1 billion, or $4.23 a share, missing analysts' consensus estimate of $4.59 a share, according to FactSet. That was its first profit decline since 2017, and followed a second quarter in which the company ended its streak of record quarterly profits and missed analyst expectations.

Revenue in the latest period rose 24% to $70 billion -- better than analysts' estimates -- compared with a 20% increase three months earlier. The third quarter included Prime Day, a July shopping event created to sign up new Prime subscriptions by offering members steep sales discounts.

Amazon's profit miss sent shares down more than 7% in after-hours trading Thursday. Before the late-afternoon report, the stock was up nearly 16% this year, giving the company a market value of around $881 billion.

"Investors were beginning to get used to the new Amazon of getting better bottom-line upside. Now, we're back to the old Amazon, which is bottom-line downside but big investments," Jefferies analyst Brent Thill said. "For short-term investors it's a bummer, but for long-term investors, they realize that with Amazon these investments usually pay off."

Amazon's third quarter typically is one when spending rises ahead of the all-important holiday season in the fourth quarter, which includes Black Friday, Cyber Monday and Christmas. For this year, spending is projected to be even higher as the company continues to invest in providing one-day free shipping for Prime members. Last quarter, Amazon said it spent more than the estimated $800 million on building out next-day shipping, citing higher costs in shifting warehouses and in moving inventory closer to customers.

Amazon's world-wide shipping costs jumped 46% to $9.6 billion from the previous year as the company processes higher expenditures related to its one-day shipping program for Prime subscribers. Online sales growth has accelerated as Amazon has invested more into one-day shipping. Sales in online stores rose 22% in the third quarter, double the growth rate a year earlier.

In the fourth quarter, the company expects to spend roughly double what it did in the second quarter on one-day shipping, or $1.5 billion, to facilitate the program, Chief Financial Officer Brian Olsavsky said on a call with media Thursday.

In addition to getting product closer to customers by having inventory dispersed among its warehouses, Amazon saw a steep hiring increase for the quarter, with employment reaching 750,000 workers. Mr. Olsavsky said this jump was more pronounced this year because of the onset of one-day Prime shipping.

The CFO said Amazon is still learning what the long-term cost structure will be for one-day shipping, but said the investment was consistent with the company's long-established pattern.

"We've been down this road before in a number of different incarnations in Amazon's history," he said about higher spending related to one-day shipping.

While costly to implement, Mr. Olsavsky said that speedier shipping is causing Prime members to shop more. "They are buying more often and they are buying more products," he said.

Amazon also signaled a weaker profit outlook for the final quarter of the year, which includes the holiday season. The company expects its operating income in the fourth quarter to fall to between $1.2 billion and $2.9 billion, down from $3.8 billion a year ago and below the $4.2 billion estimated by analysts.

Amazon Web Services, the company's cloud-computing operation and its main profit center, also showed signs of slowing growth. The unit delivered $9 billion in sales, rising 34.7% from a year earlier -- still rapid for a business of its size, but below the 37% clip of the previous quarter, which itself was slower than the 40%-or-more growth the unit typically posts.

Ron Josey, an analyst with JMP Securities, said as Amazon spends more on its shipping network, investors will increasingly look for the company's margins to be aided by growth in AWS.

"I don't think there is cause for concern with AWS growth decelerating because they are still significantly larger than the competition," Mr. Josey said. "But going forward, the question will be, what is the appropriate growth rates? Is it mid-30%? Is it low-30%? The trends are extremely strong, but deceleration does add some pressure to the stock."

Operating income of the cloud-computing business, which rents computing power to companies and the government, rose 8.9% to $2.3 billion.

The slowing growth at Amazon Web Services comes as Microsoft Corp., its chief rival in the cloud business, reported a record quarter for its cloud-services unit earlier in the week. Revenue for Microsoft's commercial-cloud operations -- which include Azure computing services, Office 365 tools and other cloud services -- increased 36% to a record $11.6 billion.

"We are in a period where we're investing heavily in AWS," said Mr. Olsavsky.

Amazon, which is the subject of antitrust scrutiny from officials in Washington, D.C., declined to answer questions related to regulatory matters on a call with reporters.

Amazon's advertising business registered $3.6 billion in sales, a 43.7% increase from the year-earlier period. The unit, which sells advertising space in the form of sponsored products in search and display ads, has become another cash cow for the company.

Amazon's international business, meanwhile, posted another operating loss for the quarter, and profit declined 37% in its North American unit, which includes the bulk of its e-commerce operations.

The physical stores segment, which includes Whole Foods, saw the steepest drop in sales over the last year.

--Sebastian Herrera contributed to this article.

Write to Dana Mattioli at dana.mattioli@wsj.com

(END) Dow Jones Newswires

October 24, 2019 19:04 ET (23:04 GMT)

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