Amazon Analysts Break Down Q3 Earnings: 'Would Be Buyers On Weakness'

Amazon.com, Inc. AMZN shares dropped 2.9% on Friday after the company reported an ugly earnings miss and disappointing guidance.

Amazon reported third-quarter adjusted EPS of $6.12 on revenue of $110.8 billion. Both numbers missed consensus analyst estimates of $8.92 and $111.6 billion, respectively. Revenue was up 15% from a year ago.

Amazon reported online sales were up 3% to $49.9 billion, while physical store revenue increased 13% to $4.27 billion.

Amazon Web Services revenue was up 39% to $16.11 billion, beating analyst estimates of $15.48 billion.

Looking ahead, Amazon guided for fourth-quarter revenue of between $130 billion and $140 billion, again missing consensus analyst estimates of $142.1 billion. The company said it expects to take a $4 billion hit from labor costs, inflation and warehouse productivity headwinds.

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Margin Pressures: Morgan Stanley analyst Brian Nowak said labor costs, inefficiencies and content spending will pressure fourth-quarter margins more than he anticipated.

“But N. Amer and AWS rev trends were positive and our opex waterfall and expectations for a smaller retail build in '22 leave us positive into '22,” Nowak wrote in a note.

JMP analyst Andrew Boone said a tight labor market and difficult pandemic comps will make life hard for Amazon for at least the next couple of quarters.

“While historically Amazon has made significant multi-quarter investments to build out fulfillment centers or reduce delivery times, we do not view current costs as investments, rather as a response to macro conditions, and believe that margins can begin to expand in 2H22,” Boone wrote.

KeyBanc analyst Edward Yruma said Amazon is facing cost conundrums.

“Intensifying cost pressures will dampen near-term results, and we worry they may be stickier than expected,” Yruma wrote.

AWS A Bright Spot: Bank of America analyst Justin Post said AWS growth was a bright spot amid labor and supply chain pressures.

“With AWS strong, the key question for [the] stock is if [the] Street sees retail margin pressure as temporary,” Post wrote.

Raymond James analyst Aaron Kessler said AWS and advertising are outperforming Amazon’s retail business.

“We believe that the topline will remain pressured into 2Q22, when comparison will begin to ease,” Kessler wrote.

Needham analyst Laura Martin said Amazon has officially transitioned from a products to a services company.

“AMZN is a services company, not a products company (our view) because Services revs reached 50.5% of 3Q revs, and we calculate that Services segment op profit was $11.4B, which was 4.6x higher than Product segment op profits in 3Q21,” Martin wrote.

Customers Over Costs: Oppenheimer analyst Jason Helfstein said Amazon is deliberately sacrificing near-term profitability in favor of long-term merchant and customer loyalty.

“We are encouraged by outperformance in high-margin AWS (3Q Revenue/EBIT 4%/18% above Street) and Other ‘Advertising’ +50% y/y,” Helfstein wrote.

Telsey Advisory Group analyst Joseph Feldman said Amazon is demonstrating its commitment to its customers.

“Unlike most retailers that are successfully passing on a portion of the inflation and higher costs to consumers, Amazon has made a proactive decision to not raise prices or fees,” Feldman wrote.

Mizuho analyst James Lee said Mizuho “would be buyers on weakness” in Amazon following its earnings miss.

“We remain positive on AMZN in the longer term, and believe that supply chain issues and elevated shipping costs are temporary, not structural,” Lee wrote.

Ratings And Price Targets:

• Morgan Stanley has an Overweight rating and $4,000 target.
• Bank of America has a Buy rating and $4,250 target.
• Raymond James has an Outperform rating and $3,840 target.
• JMP has a Market Outperform rating and $4,000 target.
• Mizuho has a Buy rating and $3,950 target.
• Oppenheimer has an Outperform rating and $4,200 target.
• KeyBanc has an Overweight rating and $4,000 target.
• Needham has a Buy rating and $4,150 target.
• Telsey Advisory Group has an Outperform rating and $3,850 target.