Amazon delivered an impressive third-quarter earnings report on Thursday, surpassing Wall Street’s expectations for both profit and revenue, fueled by robust retail sales. This upbeat performance led to a 5.7% increase in the company’s shares in after-hours trading, effectively recovering from a 3.3% decline earlier in the trading session. The company expressed confidence about the forthcoming holiday quarter—its busiest time of year—attributing this optimism to improved shipping times and a strategic decision to stock more lower-cost items.
Amazon’s strong results may signal a more encouraging holiday shopping season for retailers, who have been bracing for the slowest pace of sales growth during this critical period in six years. Just three months ago, Amazon executives cautioned that consumer spending was cautious, with shoppers increasingly seeking more affordable options. This shift in consumer behavior has prompted many retailers to adjust their strategies in anticipation of tighter budgets during the holiday season.
In the quarter ending September 30, Amazon reported a 7% increase in retail sales, totaling $61.41 billion. This performance exceeded analysts’ expectations and indicates a recovery in consumer confidence as Amazon capitalizes on its established customer base and logistics capabilities. The after-hours surge in share price more than compensated for the earlier decline, reflecting investors’ positive sentiment toward the company’s prospects.
“The most notable aspect of Amazon’s earnings was the surprising improvement in profit margins,” commented Gil Luria, head of technology research at D.A. Davidson. “There were significant concerns regarding the ability of the retail business to sustain margins, yet Amazon managed to increase them effectively.” This improvement is particularly noteworthy given the competitive landscape, where discount retailers like Shein and Temu are gaining traction by offering a wide range of goods at lower prices, often shipped directly from China.
The operating margin for Amazon’s international segment experienced a substantial jump, rising from 0.9% in the previous quarter to 3.6% in Q3. Meanwhile, the North American operating margin saw a modest increase from 5.6% to 5.9%. This upward trend in margins showcases Amazon’s ability to enhance efficiency and profitability, even in a challenging retail environment.
As the tech industry continues to evolve, Amazon anticipates increased capital expenditures to advance its artificial intelligence initiatives. In a call with analysts, CEO Andy Jassy referred to AI as a “once-in-a-lifetime opportunity” and emphasized that Amazon is pursuing this technology aggressively. The company’s capital expenditures are projected to rise significantly, estimated at around $75 billion this year compared to $48.4 billion last year, with expectations of continued growth in the future. This investment is crucial as Amazon seeks to leverage AI capabilities across its vast ecosystem, enhancing both customer experience and operational efficiency.
Amazon Web Services (AWS), the company’s cloud computing division, reported a 19% increase in sales, reaching $27.5 billion, which aligned with estimates and marked the fastest growth rate for AWS in seven quarters. While AWS accounts for about 20% of Amazon’s total sales, it generates roughly two-thirds of its profit, making it a vital component of the company’s overall strategy. However, some analysts expressed concern that the growth fell short of expectations, with whispers suggesting that projections were closer to 21% or 22%. AWS faces intense competition from Microsoft’s Azure and Alphabet’s Google Cloud, both of which reported increases in their respective cloud revenues this week, underscoring the competitive landscape.
Despite challenges in the cloud segment, Amazon has made strides in the advertising space, capturing market share from Google. Advertising sales rose by 19% to $14.3 billion, narrowly exceeding expectations. This growth was bolstered by strategic advertising placements in physical stores and on the Prime Video streaming platform, demonstrating Amazon’s ability to innovate in the advertising arena and attract more advertisers seeking to reach a ready pool of buyers.
Looking forward, Amazon’s revenue forecast for the fourth quarter projects a midpoint of $185 billion, which just missed the average analyst estimate of $186.16 billion. Luria noted that Amazon is adopting a conservative approach regarding holiday season predictions due to the inherent variability in consumer behavior during this time.
Despite the promising earnings report, Amazon shares experienced a decline prior to the announcement. However, the stock has risen nearly 23% this year, outperforming the broader market, which has seen a rise of around 20%. In its North America segment, Amazon reported a 9% increase in sales, amounting to $95.5 billion in the third quarter. Overall, total revenue reached $158.9 billion, exceeding analysts’ average forecast of $157.20 billion.
Amazon’s net income surged to $15.3 billion, reflecting a 55% increase compared to the previous year’s figure of $9.9 billion. The company reported earnings per share of $1.43, beating expectations of $1.14, demonstrating strong profitability amidst a competitive retail landscape.
In light of these positive financial results, CEO Andy Jassy has been implementing job cuts over the past year, and the company plans to introduce a controversial policy requiring employees to return to the office five days a week starting in January. This decision has sparked backlash from employees, including a protest letter from over 500 workers directed at the CEO of AWS.
Additionally, Amazon has decided to halt a longstanding practice of holding separate conference calls with its chief financial officer and reporters, which has drawn criticism for potentially reducing transparency in its financial operations. As Amazon continues to navigate a dynamic retail environment and make significant investments in technology, its latest financial results paint a promising picture for the upcoming holiday season, suggesting a rebound in consumer confidence and spending as it positions itself for future growth.
