Amazon Stock Likely to Take a Breather
Amazon.com, Inc. (NASDAQ:AMZN) announced the financial results for its third quarter on October 27. The company is known to make big investments to gain market share, and this time was no different.
But increasing costs for long-term gains may hit AMZN stock in the short term.
Amazon.com, Inc. reported earnings of $252.0 million, or $0.52 per share, in the third quarter, which was far below expectations. Sales were $32.7 billion, but the major negative was the operating expenses, which rose 29% to $32.1 billion. The only silver lining was that “Amazon Web Services” (AWS), the company’s cloud business, reported revenue of $3.2 billion. (Source: “Amazon.com Announces Third Quarter Sales Up 29% to $32.7 Billion,” Amazon.com, Inc., October 27, 2016.)
Amazon said that opening new fulfillment centers and shipping items with shorter delivery times caused its costs to soar in the third quarter. The company would have opened 26 fulfillment centers worldwide in 2016, to fill orders. The company has spent heavily in India, which has been a challenging market. In the second half of the year, Amazon.com will be spending a lot of money to fund its expansion plans. Although this is good for the future growth of the company, AMZN stock may take a beating for now.
Other areas in which Amazon will invest heavily are video content and product development, ahead of the important holiday shopping season. The e-commerce giant has been posting gains for six consecutive quarters, but its earnings streak may come to an end now, with the company’s ambitious projects in the pipeline. This might weigh on AMZN stock.
Amazon stock has been posting impressive gains this year on the back of the company’s introduction of new products and services. Its “Prime” membership program has been a big hit, as it promises members a lot of perks, together with free and fast shipping. With growth in membership, Amazon’s shipping costs also go up. This has resulted in its shipping costs going up by 43% in the third quarter to $3.9 billion.
Amazon.com, Inc. has already announced its plans of opening brick-and-mortar convenience stores and offering curbside pickup for its “Fresh” orders. The company is also focused on building its own logistics operations. These investments should help the company increase its sales. However, this will come at the cost of lower margins, and will continue to put pressure on Amazon stock.