Amazon is back in investment mode: its run of record quarterly profits is over for now and investors should buckle in for the tougher part of the cycle — back where it began its 25-year ride, investing for future growth. This time that investment is going into logistics.
Numbers released on Thursday triggered a $80bn meltdown of its market cap in overnight trading. That should not have come as a bolt from the blue. The US ecommerce giant had already warned that 2019 would be a year of investment, and its share price has trailed the Nasdaq index this year. That 15 per cent fall in group operating profit has nothing to do with waning demand from shoppers and businesses but because the workforce has grown by more than a fifth and shipping costs are up an eye-popping 46 per cent to nearly $10bn.
Costs such as that more than gobble up the $9bn of sales from cash cow (once a recipient of big investment) Amazon Web Services. But Amazon generates enough cash to keep funding its plans. In the past 12 months free cash flow is up more than 50 per cent to $23bn.
Still, revenue growth looks a little wobblier than it did; not great if spending will start to increase. Cloud computing sales growth decelerated from 37 per cent in the second quarter to 35 per cent this time just as rivals such as Microsoft and Google ramp up their efforts in a business dominated by AWS.
More worryingly, Amazon lowered guidance for revenue growth and profits in the next three months, which includes the holiday season. It is dealing with issues such as quality control given rising reliance on third-party retailers. Competition on ecommerce is also rising, as traditional bricks-and-mortar retailers such as Walmart and Target spend heavily to cut US shipping times. Walmart has rolled out free one-day delivery, while Target shoppers can get their goodies in two days.
No wonder investment is rising. Amazon has the edge for now but it cannot afford any complacency.
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