Amazon Forecasts Holiday Sales That May Miss Estimates

  • Expenses gained 29 percent on investments in warehouses, video
  • Operating income projection shows rising profits may slow

Prime Time: Breaking Down Amazon's Earnings Inc. forecast a holiday quarter with operating income that may break even and sales that could miss estimates. The outlook spooked investors accustomed to widening profit margins at the e-commerce bellwether.

Sales in the current quarter will be $42 billion to $45.5 billion, the Seattle-based company said Thursday in a statement. Analysts estimated $44.6 billion, according to data compiled by Bloomberg. Shares declined as much as 9 percent in extended trading after closing at $818.36 in New York.

The forecast tempered enthusiasm that had boosted shares by about 25 percent this year, making Chief Executive Officer Jeff Bezos the world’s third-wealthiest man. The optimism was fueled by the company’s rising profit and its ability to add customers to the $99-a-year Prime subscription service. Those consumers become Amazon’s most loyal, biggest spending shoppers.

Investors are worried that Amazon’s big investments in initiatives like warehouse expansion, grocery delivery and video production represent a spending cycle that will chew into profit margins. Expenses rose 29 percent to $32.1 billion in the quarter. The company said operating income in the holiday quarter will be from zero to $1.25 billion.

“Is the margin expansion story on pause for the time being, which will be the big question, especially as we head into the all important holiday quarter,” said Ron Josey, an analyst at Jmp Securities.

Amazon could win investors back with a strong fourth quarter if spending subsides. Its share price has zig-zagged upward the past few years, with drops during periods of heavy investment followed by gains after more profitable quarters. For now, investors are concerned that Amazon’s expenses will eat up revenues growing at more than 20 percent as Bezos chases what he sees as the company’s next big opportunity.

New Warehouses

Amazon Chief Financial Officer Brian Olsavsky said the higher expenses were driven by construction of new warehouses and shipping centers and expansion of the company’s video content with original productions.

“There is an investment period that is ramping up in the second half of this year led by fulfillment centers and content spend,” he said.

Amazon revenue gained 29 percent to $32.7 billion in the third quarter. Net income was $252 million, or 52 cents per share, compared with $79 million, or 17 cents, a year earlier. Analysts estimated profit of 78 cents a share on sales of $32.7 billion.

Amazon Web Services revenue was $3.23 billion in the third quarter, up 55 percent from a year earlier. Cloud computing is the fastest-growing and most profitable segment of the world’s largest e-commerce company.

“Expectations are high, but there’s always the risk of competition and Bezos investing in a massive long-term strategy,” said Vic Anthony, an analyst at Axiom Capital Management. “Competition is still an issue and it’s only becoming more intense.”

Amazon remains in position to gain market share during the holiday season as consumers increasingly shop on computers and smartphones. Online spending in November and December will rise 17.2 percent -- more than five times the rate of total retail spending, according to research firm eMarketer.

Amazon Prime rose 38 percent to 65 million members in the U.S. as of Sept. 30, according to Consumer Intelligence Research Partners. The service offers fast, free delivery and access to video and music programs.

    Before it's here, it's on the Bloomberg Terminal.