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Market Insights

Amazon complete the big tech horror show

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Amazon reported earnings after the close. Another horror show. The online giant can at least find some comfort in not being the only stock to fall by more than 20% this week after Meta’s descent into darkness. But is the pessimism overdone?

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First, the good news. Amazon’s sales are growing. The company hit $127.1 billion of net sales in Q3. The not so good news… That was below analyst estimates of $127.5 billion (what’s $400 million between friends?), but more importantly Amazon disappointed hugely on their Q4 guidance.

The company now sees net sales of between $140 billion and $148 billion in Q4, falling well short of analyst estimates of $155 billion.

Amazon Chief Financial Officer Brian Olsavsky explained the expectations of weakness ahead:

"We are seeing signs all around that, again, people's budgets are tight, inflation is still high, energy costs are an additional layer on top of that caused by other issues. We are preparing for what could be a slower growth period, like most companies."

Olsavsky added a somewhat positive, yet uncertain caveat for Q4:

“We're very optimistic about the holiday, but we're realistic that there's various factors weighing on people's wallets, and we're not quite sure how strong holiday spending will be versus last year.”

The CFO also noted that sales overseas, particularly in Europe, were starting to slow:

“It was mostly in international we saw the biggest impact, and we think that is tied to a tougher recessionary environment there. Even if you compare it to the US, it's worse in Europe right now. The Ukraine war and the energy price issues have really compounded in that geography.”

European weakness is a clear theme to emerge from big tech earnings. We saw similar with Meta’ s revenues this week too:

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Perhaps more worryingly for Amazon, lucrative profit generator Amazon Web Services (AWS) also missed estimates. Olsavsky said that AWS customers were starting to turn cautious:

“There are some industries that have lower demand… like financial services, the mortgage business being down, cryptocurrencies have been down.”

“And I think everyone is just cautious, and they want to again watch their spend”

Excluding AWS ($5.4 billion profit), Amazon reported losses of $2.9 billion (on sales of $106.5 billion). They’ll need to watch their own spending too! Fortunately, CEO Jassy is already on the case:

“We’re also encouraged by the steady progress we’re making on lowering costs in our stores fulfilment network, and have a set of initiatives that we’re methodically working through that we believe will yield a stronger cost structure for the business moving forward.”

“There is obviously a lot happening in the macroeconomic environment, and we’ll balance our investments to be more streamlined without compromising our key long-term, strategic bets.”

Margin pressures are likely to be a key theme for Amazon in coming quarters.

No such problems for Apple. Although they did slightly miss estimates on iPhone and iPad sales and highlighted the potential for slightly slower sales growth ahead, the firm also posted a record gross margin of 43.3% for the quarter. An altogether different beast!

Not investment advice. Past performance does not guarantee or predict future performance.

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