Naughty Flicks

Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenuAmazon on Thursday evening delivered a rare double miss. Shares of the e-commerce and cloud giant sank in after-hours trading as quarterly revenue and earnings fell short of estimates. Weaker-than-expected retail sales and advertising revenue offset strong Amazon Web Services numbers. Current quarter guidance also missed, though management was probably being conservative there. Revenue increased 12% year over year to $201.9 billion, missing the consensus analyst estimate of $202.3 billion, according to LSEG data. Earnings per share based on generally accepted accounting principles (GAAP) fell 3% year over year to $1.89, missing the consensus estimate of $1.96, according to LSEG. Operating Income of $28 billion beat analyst forecasts by about $1.8 billion, according to FactSet. AMZN YTD mountain Amazon YTD Amazon’s roughly 6.5% post-earnings slide followed up a 4% decline during the regular session. Bottom line At around $228 per share, the Club stock has given back the entire 15% pop it got last quarter , when CEO Andy Jassy explained the line of sight he has on achieving attractive returns on the company’s data center investments. While Jassy’s vision remains clear, the market has become much more skeptical about the returns on each dollar invested in AI infrastructure and how companies will fund these massive spending programs, especially as free cash flow turned negative, as it has for Amazon. Add in the slowdown in Amazon’s core retail businesses — online stores and advertising — and it was a recipe for a disappointing quarter. Still, we see plenty to like about Amazon, including its multiyear AWS growth outlook that could move forward estimates higher, improving margins that allow management to keep reinvesting in the business and make its products and services strong, and likely conservative guidance that will be beat. But a miss is a miss. The long-term drivers keep us positive on the stock as we’re reiterating our buy-equivalent 1 rating. We are, however, trimming our price target to $280 from $300 in recognition of the shifting investor expectations and the stock’s drop from its record closing high of $284 back on Aug. 3. Commentary Revenue growth at cloud unit Amazon Web Services (AWS) accelerated for the sixth straight quarter. At 39.3% year over year, AWS recorded its fastest growth rate in nearly five years. This result was better than what analysts forecasted, but investor expectations may have been for a bigger quarter-over-quarter increase, especially after the strong cloud results from Microsoft and Alphabet on Wednesday night. AWS revenue was $45.98 billion, up from $42.23 billion in the second quarter. One important driver of AWS’ growth was Bedrock, which the company said has become the fastest-growing multibillion-dollar service in the cloud unit’s history. Amazon Bedrock is an AWS service that allows businesses to build and deploy generative AI applications using foundation models from leading AI companies without having to manage the underlying infrastructure. AWS operating income and operating margin also beat expectations. The fast sales growth led to strong operating leverage, with margins bumping up to 38.65% from 33.64% a year ago. In total, AWS operating income of $17.77 billion beat the consensus estimate of $16.97 billion. Once again, we heard Jassy tout the performance of its portfolio of in-house chips, such as Graviton and Trainium. After previously telling the Street there was a “real chance” Amazon would begin selling its chips directly to customers outside AWS, Jassy said the company now plans to start doing so in late 2027. The AWS backlog closed the quarter at $578 billion, up triple digits year over year and 16% from the second quarter. The backlog gives Jassy the confidence to project AWS revenue will grow by over 40% in both 2027 and 2028. That’s well above the current consensus estimate of 35.47% in 2027 and 34.8% in 2028. In the next five to 10 years, Jassy believes AWS can be a $1 trillion revenue business. As for the rest of Amazon’s business segments, there were solid revenue beats across Third-Party Seller Services, Subscription Services, and Other (which includes healthcare, licensing, co-branded credit cards, and other businesses). However, Online Stores, Physical Stores , and Advertising missed. These misses are outweighing the positives because Online Stores are the foundation of Amazon’s retail business and Advertising is a high-margin revenue stream. Amazon’s soft advertising numbers follow the miss we saw from Alphabet. Amazon attributed its slowdown in advertising growth to “timing anomalies,” including the shift of Prime Day into the second quarter in most countries, the timing of NBA games on Prime Video, and changes to its search engine marketing programs in the third quarter of last year that drove more traffic to Amazon’s search pages. Amazon expects advertising revenue growth to return to the high teens in the fourth quarter. An important part of the call came when Andy Jassy discussed the potential impact of agentic shopping on Amazon’s advertising business, or rather, why he expects little to no impact at all. The concern when Meta Platforms launched Muse was that personal AI agents would buy products on Amazon on behalf of users, bypassing sponsored listings and potentially undermining Amazon’s advertising business. While that may still be a possibility in the future, agentic shopping has yet to gain enough traction to meaningfully impact Amazon’s advertising business. “Few customers are doing much shopping this way yet, as the experience is still not great nor more convenient than coming to a retailer directly to research or one-click order there,” Jassy said on the call. By region, North America sales increased 6% year over year to $112.8 billion, missing the consensus estimate by about $370 million. Operating margins expanded 322 basis points over last year to 7.73%. In the International segment, revenue increased 5% year over year, but that missed by about $450 million.Operating margins expanded by 73 basis points. On the Capital Expenditures side, Amazon spent approximately $77 billion in the quarter, up from $53 billion in the second quarter and $44 billion in the first quarter. The company reiterated its expectation of $220 billion in capex this year, so a significant step down is expected in the fourth quarter. But Amazon still expects to spend “meaningfully more” next year “with a clear line of sight to attractive financial returns.” Free cash flow over the past 12 months is negative $42.4 billion. Guidance Amazon provided guidance for the current fourth quarter that was slightly below the street. These forecasts are usually pretty conservative, but the market is placing a lot of emphasis on it because it’s the holiday quarter for online stores. For the fourth quarter, Amazon guided net sales to the range of $240 billion and $247 billion. This midpoint of $243.5 billion is below the Street consensus estimate of $244.16 billion. Fourth quarter operating income is expected to be between $28.5 billion and $33.5 billion. This midpoint of $31 billion is below the Street consensus estimate of $33 billion. (Jim Cramer’s Charitable Trust is long AMZN, GOOGL, META, MSFT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.Read More