After its quarterly earnings report, Amazon.com (NASDAQ:AMZN) stock fell below $1720 on Oct. 25, only to snap back nicely the same day. Even though the cloud computing and e-retailing giant lost a Pentagon cloud contract worth as much as $10 billion to its competitor, Microsoft (NASDAQ:MSFT), investors decided that buying AMZN stock on weakness would pay off.
The markets may prove that bullishness wrong if the pressures on Amazon.com’s AWS worsen in the future. Still, investors need to weigh the mixed Q3 results against the company’s upcoming seasonal strength.
Microsoft Selected Over Amazon.com by the Pentagon
The U.S. Defense Department selected Microsoft for the Pentagon’s Joint Enterprise Defense Infrastructure (JEDI) project, worth up to $20 billion. Amazon.com did not really have much of a chance.
Microsoft’s data centers run a dedicated Azure Active Directory (“AAD”) that athenticates users of Office 365 and Azure. Amazon.com’s AWS does not have such an end-to-end solution, which the DoD requires.
Q3 Results and Commentary
Amazon.com reported that its cash flow had risen 53% year-over-year in Q3 to $23.46 billion. Its net sales jumped from $56.58 billion to $69.98 billion. But the company’s operating income fell 15% to $3.16 billion while its net income sank 26% to $2.13 billion.
AWS’ performance lagged due to higher sales costs and elevated marketing costs . Additionally, its infrastructure costs rose 30% in the 12 months that ended in September .
But higher operating costs are a reflection of stronger demand for its offerings. This suggests that AWS’ profitability will improve going forward.
On the commerce side, costs rose as Amazon extended its one-day shipping service. One-day shipping continues to differentiate the company from its competitors.
As long as others are unable to offer this service, Amazon.com will have a moat. Still, both WalMart (NYSE:WMT) and Best Buy (NASDAQ:BBY) are offering free next-day shipping. If Amazon’s competitors successfully offer the service, customers may be less inclined to use Amazon.com.
History is on Amazon’s side: in the last two years, the YoY growth of its unit sales (the increases in the number of products it sold) accelerated in Q3 and Q4. The fact that Amazon’s prices are falling will also cause customers to buy more from the site.
Seasonal Strength Ahead for AMZN Stock
Seasonal strength in Q3 will cause revenue growth to accelerate meaningfully. If the costs of providing one-day shipping fall, AMZN’s profits will rise.
Faster shipping times and new devices should accelerate AMZN’s revenue more than usual, providing a positive catalyst for AMZN stock.
Somewhat offsetting the seasonal strength is the fact that the consumption tax in Japan rose from 8% to 10% as of October 1. The increase will likely have a negative impact on AMZN’s Q4 Japan sales.
Moreover, Amazon.com eliminated its $14.99 per month fee for its Amazon Fresh grocery service. Prime members will get free delivery, spurring higher grocery sales and providing AMZN stock price with another positive catalyst.
The Bottom Line on AMZN Stock
Investors should no longer count on Amazon’s AWS business boosting AMZN stock. Instead, its core e-commerce business needs to demonstrate strong sales growth in the traditionally strong holiday shopping period. AMZN stock price rebounded and erased its losses after the earnings report, showing that investors are also expecting strong results from AMZN ahead. If AMZN stock dips again, considering taking a bullish position in AMZN.
As of this writing, the author did not hold a position in any of the aforementioned securities.