Amazon Addresses Margin Pressures Through Product Upgrades

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Amazon’s (NASDAQ: AMZN) recently announced results highlight the pressures of higher labor costs impacting the global markets. Surprisingly, Amazon failed to meet the market’s expectations for the quarter and believes that these pressures will continue into the current holiday quarter as well.

Amazon’s Financials

Amazon’s third-quarter revenues grew 15% to $110.81 billion, behind the market’s forecast of $111.83 billion. Net income of $6.12 per share was significantly lower than the Street’s forecast of $8.90 per share.

By segment, net product sales grew 3.99% to $54.88 billion and net service sales increased 28.97% to $55.94 billion.

By region, revenues from North America grew 10.42% to $65.56 billion. International revenues grew 16% to $29.15 billion compared with the 26% growth reported a year ago.

Revenues from Amazon Web Services (AWS) increased 38.87% to $16.11 billion. Subscription services revenues grew 24% to $8.15 billion. Revenues from the “other” category, which primarily includes advertising grew 50% to $8.09 billion.

For the fourth quarter, Amazon expects revenues of $130-$140 billion and operating income of $0-$3 billion. The market was looking for revenues of $141.9 billion.

Amazon’s Product Upgrades

The recent supply issues and labor shortages have impacted Amazon’s retail business. With the mounting pressure on Amazon to increase its wages, it raised its starting wages to $18 an hour. The inflationary pressures in raw materials and services also added to its costs. Last quarter, more than $1 billion of costs were tied to this loss of productivity and disruption in operations. But during the quarter, labor was its primary capacity constraint. To address this, Amazon had to manage inventory placement and had to redirect products to fulfillment centers that had the labor to receive the products. This resulted in longer and more expensive transportation routes, driving costs higher while ensuring customer service levels were maintained.

Amazon hopes to address some of these concerns through continued product expansion. It recently launched a new gift-giving feature that enables US Prime members to use the Amazon mobile shopping app to send gifts with just the recipient’s email or mobile phone number. Within the international markets, it launched its Great Indian Festival sales event, which features more than 75,000 small businesses selling on Amazon from 450 cities across India. It also expanded operations in Egypt and launched its Prime offering in other European countries including Sweden and Poland.

Within its video content, Prime Video has an impressive lineup of live sports, including the UEFA Champions League and League One soccer in France along with NFL Thursday night football in the United States. Its original content is growing as well as it announced the upcoming release of the?Wheel of Time, Lord of the Rings, and?Citadel?and new seasons from?Jack Ryan, the?Marvelous Mrs. Maisel?and?The Boys. It also released the Amazon Original movie?Cinderella, starring Camila Cabello, which was the leading streamed movie across all films on streaming platforms during its opening weekend and the leading musical of the year.

To continue to maintain its leadership within the cloud, Amazon released several new upgrades. Recently, it announced the general availability of Babelfish for Amazon Aurora PostgreSQL-Compatible Edition. The service gives customers the ability to run applications written for Microsoft SQL Server directly on Amazon Aurora with minimal changes to their code. Besides the Amazon Aurora offering, the source code for Babelfish for Aurora PostgreSQL is also available on GitHub for anyone to view. Organizations can use the offering for any purpose including distributing or modifying it.

It also announced the availability of Amazon Elastic Compute Cloud (Amazon EC2) DL1 instances. The product is powered by Gaudi accelerators from Habana Labs to provide nearly 40% better price-performance for training machine learning models as compared to the latest GPU-powered Amazon EC2 instances.

Additionally, AWS announced the availability of the AWS Panorama Appliance, a device that is installed in facilities to run applications to analyze multiple video streams from existing on-premises cameras. Customers will be able to use computer vision technology to quickly and easily perform visual inspections of production lines, enhance customer experiences at quick-service restaurants, and optimize the layout of physical retail stores.

Its stock is trading at $3,518.99 with a market capitalization of $1.78 trillion. It had touched a 52-week high of $3,773.08 in July. It had fallen to a 52-week low of $2,881.00 in March.

Disclosure:?All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

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