Amazon Tumbles on Disappointing Forecast for Holiday Revenue

(Bloomberg) -- Amazon.com Inc. issued a disappointing revenue and profit forecast for the busy holiday quarter, suggesting sales growth is slowing for the e-commerce giant while higher pay for warehouse workers could hurt the bottom line.

Revenue will be $66.5 billion to $72.5 billion in the current period, the Seattle-based company said Thursday in a statement, falling short of analysts' average estimate of $73.8 billion. Operating income will be $2.1 billion to $3.6 billion, Amazon said. Analysts projected $3.9 billion.

Investors are worried about the weak profit outlook and the increased pace of spending, said RJ Hottovy, an analyst at Morningstar Inc. Are expenses increasing as a result of one-time costs such as preparing for a second headquarters or ongoing items like raises for warehouse workers and opening new AmazonGo cashier-less convenience stores? he asked.

“It all comes down to not knowing why they expect to have heavier spending in their busiest quarter,” he said.

Amazon's total operating expenses increase 22 percent to $52.9 billion in the third quarter. The company this month pledged to pay all warehouse workers at least $15 an hour, which will affect 400,000 employees in the U.S. and U.K., Chief Financial Officer Brian Olsavsky said. Amazon isn't disclosing the total cost of the raises.

While Amazon's sales forecast missed estimates, U.S. shoppers are projected to increase their online spending by as much as 22 percent this holiday season, according to Deloitte Insights. Amazon is poised to benefit from that shift, capturing almost half of all U.S. online sales, according to EMarketer Inc. The company has dominated e-commerce in the U.S., but faces stepped-up competition from rivals like Walmart Inc.

Revenue gained 29 percent to $56.6 billion in the third quarter. Analysts' projected $57.1 billion. It was the second consecutive quarter that sales fell short of estimates and the first time for the back-to-back revenue miss in almost four years.

The company showed slowing revenue growth in all categories quarter over quarter, including online sales and subscription sales, Amazon Web Services sales and its fast-growing advertising business. Amazon has relied on the growth of its Prime members, estimated at about 97 million in the U.S., who pay fees in exchange for shipping discounts, video streaming and other services.

Investors are wondering whether Amazon is reaching a saturation point. Growth in its central business of selling merchandise online has slowed quarter-over-quarter for four consecutive periods.

“That's a bit concerning,” said Brian Yarbrough, analyst at Edward Jones & Co. “They aren't taking massive market share the way they were three or four years ago.”

Amazon's stock had gained about 50 percent this year, as investors bet on the company's continued dominance and its expansion into new areas. The shares have dropped about 15 percent from their September high amid a broader market downturn and closed at $1,782.17 before the results were released. The stock declined as much as 9.4 percent in extended trading.

Amazon also is investing in physical stores and the pharmacy business. It purchased online pharmacy PillPack in June, which followed its $13.7 billion acquisition of Whole Foods last year to jump start its grocery business. It has opened AmazonGo stores -- which sell premade sandwiches, salads and grocery items -- in San Francisco and Chicago. The company's fast-growing cloud computing and advertising units, which are more profitable than its main e-commerce business, help fuel Amazon's investments in more retail categories, video content and devices such as tablets and Echo smart speakers.

Amazon Chief Executive Officer Jeff Bezos spends heavily to keep ahead, building new warehouses and data centers around the world, inventing new devices and trying to re-imagine the convenience store experience. Investors can get skittish when signs suggest the company is ramping up expenses without regard to maintaining a profitable business.

Amazon reported net income of $2.88 billion, or $5.75 a share in the third quarter, from $256 million, or 52 cents, a year earlier. Analysts estimated profit of $3.11 a share.

To contact the reporter on this story: Spencer Soper in Seattle at ssoper@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack, Molly Schuetz

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