Wall Street was not happy with Amazon’s third-quarter results, and that’s putting it mildly. The shares fell 13 percent on the day, as Amazon missed consensus earnings estimates and predicted a subdued holiday season.
Amazon showed just 15 percent year-on-year growth in revenues, which is a marked slowing from the 20 to 30 percent increases enjoyed over the past three years. Admittedly, it would have had 19 percent growth if currency headwinds hadn’t trimmed the dollar value of overseas sales.
Overseas sales actually fell in dollar terms. However, in terms of local currencies, revenues increased by 12%; so if you’re a player in one of Amazon’s international markets, no need to worry that your market is going to disappear.
Operating income for Amazon as a whole nearly halved. But this all came from the cloud computing business AWS; the e-commerce business made a loss, as the result of high investment in 2021 together with inflationary pressure on costs.
However, the worst part of the results from a shareholder’s point of view was the fact that Amazon’s cloud computing business, which has been the major growth contributor for the last couple of years, started to slow, and its operating margins also fell. For many tech investors, it’s the cloud business that justified Amazon’s high share price; if the cloud business is going ex-growth, Amazon ends up looking like Walmart with server farms rather than a global tech giant.
Worse than a single-quarter disappointment, though, was the news that Amazon has downgraded its expectations for the holidays, and things are getting worse, not better. It’ looking for single figure revenue growth, between 2 percent and 8 percent, though that again includes a hit from foreign currency movements (of about 5 percent).
The fourth quarter is when any retailer makes most of its money, so that will really hurt operating income. In fact, Amazon admitted it might only be able to break even if it can’t exceed the low end of its growth range.
There’s another interesting figure in the results; ad sales rose 25 percent, while US sales rose only 20 percent. So it looks like more advertising spend is chasing each dollar of sales, but not by much.
So what does this mean for FBA sellers? Nothing you didn’t already know, in fact. You already realized consumers were tightening their belts as inflation hit household budgets. You’ve probably already seen ad costs going up, and may have changed your keyword mix to try to get better value out of your ad spend.
This holiday season probably won’t be as good as it could be. You’ll need to navigate choppy waters with a mix of promotional ideas, discounts, and ad spend. You’ll need to be on top of your game to win market share off your competitors. But if you run your FBA business properly, you should be able to do well.
If you add back that 5 percent currency hit to 8 percent spend, you get 13 percent ‘real’ growth in revenues, which isn’t bad. Admittedly, that’s the top end of Amazon’s range, though given the circumstances it wouldn’t be surprising if Amazon management were deliberately steering Wall Street to expectations sufficiently low that they think they can beat them fairly easily.
Add some market share and some new products, and even if you don’t make spectacular gains you should be able to reach 20 percent growth as an FBA seller unless you’re in a very unpopular or very competitive market.
Are the wheels coming off the Amazon bus? For shareholders, maybe. But Amazon isn’t bleeding money, and since it’s reined back its costs, it should be easily able to withstand anything the economy can throw at it for the next couple of years.
Don’t worry about Amazon disappearing as a market place. That’s not going to happen. As for whether you should invest your money in Amazon, that might be a different story!