Amazon’s holiday-quarter forecast signals e-commerce giant is back in ‘very heavy investment mode’

Amazon (AMZN) posted third-quarter results and guidance that fell short of expectations, with Wall Street balking as the e-commerce giant forecasted billions of dollars in additional costs heading into the holiday shopping season. 

The announcement sent Amazon shares tumbling immediately following the report. However, at least one analyst suggested Amazon’s heavy spending is yet another sign that the company is remaining laser-focused on investing for the future — even if it means giving up some profits in the near-term. 

“I think the company … really emphasized [and] reminded investors that its focus has always been on the long term,” CFRA analyst Tuna Amobi told Yahoo Finance Live. “They’re now back in that very heavy investment mode that we saw several years ago. And that’s where you’re seeing the disconnect between analysts’ expectations and their reported numbers.”

Amazon posted third-quarter sales that grew 15% over last year to $110.8 billion, coming in short of the $111.8 billion expected, based on Bloomberg consensus data. Earnings per share halved over last year to come in at $6.12, and operating income fell to $4.9 billion from $6.2 billion in the year-ago period.

For the fourth quarter, Amazon said its operating income could come in between breakeven and $3 billion, coming in well short of the $7.4 billion estimated. A slew of added costs contributed to this weaker-than-anticipated bottom-line forecast. 

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Amazon CEO Andy Jassy said in the company’s earnings release. “It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

Those “billions of dollars” in expected additional costs are consistent with the kinds of major investments Amazon has made in the past, which ultimately helped fuel further growth in the business. Amazon had spent nearly $1.5 billion in the holiday quarter of 2019 alone to build out its one-day shipping operations, on top of announcing an $800 million investment in the speedier shipping just earlier that year. That move had fueled an arms race between competitor retailers including Walmart (WMT) and Target (TGT) to offer similarly rapid delivery options. 

Amazon fulfilment center in Sosnowiec, Poland on 13 May, 2019. (Photo by Beata Zawrzel/NurPhoto via Getty Images)

And in the past year-and-a-half, Amazon has also spent billions in building out its operations to navigate pandemic-related challenges. In the second quarter of 2020, Amazon spent $4 billion in incremental virus-related costs on personal protective equipment and cleaning for its facilities, family care benefits and special bonuses to its employees and delivery partners. Even given these elevated expenses and impacts to operating profits, Amazon’s stock jumped 76% in 2020, outperforming the market and making it the second-best Big Tech stock performer after Apple (AAPL) for the year. 

Aside from concerns over rising costs, Amazon’s latest earnings report and guidance also reflected a slowdown in e-commerce sales growth, with online sales rising just 3% to reach $49.9 billion in the third quarter and missing consensus expectations. But according to Amobi, Amazon is still in a position of strength when it comes to capitalizing on a longer-term shift to e-commerce shopping among consumers, even given some of the supply chain-related issues in the short-term. 

“We were actually very wary of the potential impact of this supply chain coming into this holiday selling season. There’s no doubt that it’s going to be a major factor. And I think the potential impact [in Q3] could actually continue into the first half,” Amobi said. 

“That being said, they are going to have the benefit of cycling through some of the less robust or less difficult comparisons, as they enter next year,” he added. “The e-commerce business is always going to have that secular underpinning of more people shopping online. And especially now that people are kind of working from home … that is going to be something, I think, that sustains the e-commerce business for quite some time.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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