Amazon Profits Disappoint, Shares Tumble

Amazon Building

Amazon’s third quarter results failed to live up to expectations, with these sending the shares of the retail giant on the downward curve.

The online retailer on Thursday reported earnings of $252 million, or 52 cents a share, in the third quarter. The profit declared was the lowest since the $79 million, or 17 cents per share, reported in the same quarter a year ago.

Earnings widely missed the expectations of Wall Street. In a poll by Thomson Reuters, analysts had predicted earnings of 78 cents a share.

The disappointing profit saw Amazon shares crashing down by about 7 percent in after-hours trading on Thursday.

The lower-than-expected earnings were the result of increased costs, as the company stepped up on investments that would enable it to meet customers’ demand. It explained that it spent money on building new warehouses and shipping items faster.

Amazon has added 26 order fulfillment centers so far in 2016, compared to 14 in the whole of last year. And of that total, 23 were opened in the recently-concluded quarter.

The company has also splashed the money to improve on how fast orders are delivered to those on its $99-per-year Prime membership program, who are believed to spend twice more money on the platform than those who are not part of the program. Shipping costs jumped 43 percent to $3.9 billion during the quarter.

Chief Financial Officer Brian Olsavsky said on a media call on Thursday that the increased investment was aimed at making Amazon ready to handle high number of holiday orders that are expected in the fourth quarter.

Amazon expects to make more huge investments through the end of 2016.

“Amazon is still in investment mode, and the Street should not necessarily expect linear growth in profitability,” Colin Sebastian, analyst at Robert W. Baird & Co., said.

Sales of $32.7 billion posted during the quarter merely outstripped operating expenses which rose by 29 percent to $32.1 billion. Operating margin was just 1.8 percent, down from 4.2 percent in the preceding quarter.

The major delivery partners of the retailer were not able to deliver orders on time during the holiday season of 2013. That made it to increase investments on developing its own shipping business. It has added more delivery capabilities in 2016 while also arranging capacity with partners, according to Olsavsky.

Amazon is buying branded truck trailers and leasing about 40 planes to carry goods, with its CFO saying: “We want to control our own destiny.”

The company has been shipping more items because of the expansion of Fulfillment by Amazon, a program which handles shipping of merchandise ordered from third-party sellers. The increase was partly responsible for the rise in investments.

In spite of earnings coming in lower than expected, the quarter was the sixth consecutive one the online retail giant has recorded a profit.

Amazon also stepped up investment on its digital content, its fast-growing cloud division Amazon Web Services, and the Echo speaker, which works with Alexa assistant.

The retailer has issued revenue guidance of between $42 billion and $45.5 billion for the fourth quarter, compared to analysts’ expectations of $44.6 billion.