Author: Lindsey Boycott
Estimated read time: 3 minutes
Publication date: 4th Nov 2019 13:24 GMT+1
Amazon (NASDAQ: AMZN) is Wall Street's darling, and its recent announcement of Q3 earnings falling short of predictions has done little to shake its faith. Even the e-commerce giant’s soft guidance of $80 to $85 billion for Q4 compared to the expected $87.4 billion hasn't taken the bloom off Amazon's financial rose.
The company exceeded the original $800 million it allotted for Q2 to put one-day shipping into place, and additional costs were carried through into Q3. According to Amazon's CFO Brian Olsavsky, there have been substantial investments made, and more is to come. Regardless, he believes it will be worth it.
“So, as we head into Q4 we’ve added what’s just nearly a $1.5 billion penalty in Q4 year-over-year for the cost of shipping, which essentially is transportation costs, the cost of expanding our transportation capacity, things like adding additional roles and shifts in our warehouses,” Olsavsky said.
Analysts are saying It's the price of growth as the company moves to put one-day shipping in place before the holiday season. Many shops are advising that investors use the pullback to buy more shares in the company – JP Morgan analyst Doug Anmuth said: “We’ll take the trade-off of lighter profits for higher revenue – Amazon’s earned it. We’re buying the pullback.”
Additionally, Barclay's, Moody's, and SunTrust have offered their own votes of confidence for the stock. “We continue with our view that Amazon’s robust liquidity, with over $42 billion in cash and short-term investments, as well as AWS’ steady $2.3-plus billion in operating income per quarter, provides the company with significant runway to continue with its myriad, necessary investments,” said Moody’s Amazon analyst, Charlie O’Shea.
Amazon also made the news after the Pentagon announced that Microsoft beat out AWS, the company's cloud-computing arm, on the Department of Defense's $10 billion JEDI contract. It's a significant loss for the business as AWS is a primary profit-driver for Amazon – the $9 billion it brought in for Q3 accounted for nearly 72 percent of its total operating income.
"We're surprised about this conclusion," an AWS representative said in a statement. "AWS is the clear leader in cloud computing, and a detailed assessment purely on the comparative offerings clearly lead to a different conclusion." Amazon has stated they are still weighing their options, but analyst Danny Ives, Wedbush Securities, predicts that Amazon and “others” may challenge the decision in court.
Another reason investors are having second thoughts about Amazon's stocks are due to antitrust concerns. Democratic leader hopeful, Elizabeth Warren, has openly spoken about breaking up the web giant. While it's arguable that each segment could successfully stand on its own – others are not so sure.
In short, most believe that Amazon remains a strong long-term buy for investors. According to SeekingAlpha’s the Value Investor, the tech firm continues to benefit from its tremendous buying power, an extensive network of interrelated services, and openness to sacrificing short-term profit for long-term growth. If the company can navigate these challenges and maintain its upward trend, it will be a solid investment for the future.
Disclaimer: Lindsey Boycott is an experienced financial consultant who writes for Finscreener.com. The observations she makes are her own and are not intended as investment or trading advice.
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