Amazon shares drop after Q3 operating profit beats but EPS misses and Q4 forecast underwhelms

Investors received mixed signals from the report, and how the stock reacts could depend on whether the margin beat or the weak profit outlook carries more weight. The cloud division's numbers back the view that AI demand continues to grow, a factor relevant for other large cloud providers and semiconductor companies due to report this season. A guidance midpoint that falls short of consensus before the holiday quarter might limit any upside in Amazon's stock and hurt sentiment for consumer discretionary names more broadly. Given Amazon's heavy weighting in the Nasdaq 100 and the S&P 500, any price move will affect US index futures during the Asian trading session.

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• Amazon and Intel were among the major companies reporting earnings after today's market close.

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Amazon managed to extract a higher profit from a quarter that came in only slightly below forecasts, though an earnings per share shortfall and a guarded outlook for the holiday season place the burden of the positive surprise firmly on the cloud business.

Key figures from the quarter:

• Third-quarter earnings per share of $1.89 missed the consensus estimate of $1.97.
• Net sales came in at roughly $202 billion, slightly short of forecasts, while operating profit of about $28 billion topped expectations by some $2 billion.
• The operating margin hit 13.9%, compared with the anticipated 12.9%.
• AWS sales of approximately $46 billion barely surpassed estimates, with revenue growing 39% on an FX-adjusted basis versus the 38% that analysts had predicted.
• North American net sales of roughly $113 billion and physical-store revenue of around $5.7 billion both fell a little short.
• For the fourth quarter, Amazon guided for sales between $240 billion and $247 billion and operating profit in the $28.5 billion-to-$33.5 billion range; both midpoints are below the Street's expectations.

For the third quarter, Amazon posted an operating profit that beat expectations, supported by a wider margin and a small upside in its cloud business, but EPS came in light and the Q4 forecast was largely below what analysts had modeled.

Operating profit reached about $28 billion, about $2 billion more than the consensus, and the operating margin of 13.9% exceeded the 12.9% forecast. That margin strength was the highlight of the release. EPS, though, was $1.89, below the $1.97 analysts had expected. That points to costs or charges beneath the operating level dragging down net income. The preliminary numbers did not provide a breakdown of what caused the shortfall.

Total revenue of roughly $202 billion was slightly below the expected figure, a miss by less than 1%. Amazon Web Services, the unit that gets the most investor attention, produced around $46 billion in sales, a little above projections. On a constant-currency basis, AWS revenue increased 39% year over year, one percentage point above analyst estimates. The numbers will be seen as evidence of demand for cloud computing and AI infrastructure.

The retail segment showed weakness. North American net sales of around $113 billion fell just short of projections, and physical-store revenue of about $5.7 billion likewise came in a bit light.

The forecast will probably attract as much scrutiny as the quarter's results. Amazon projects Q4 revenue of $240 billion to $247 billion. That range encompasses the consensus of roughly $245 billion, but the midpoint of approximately $244 billion lies just below that. For operating profit, the view is $28.5 billion to $33.5 billion, with a midpoint of about $31 billion, roughly $2 billion under the near-$33 billion analysts were looking for, though the upper end is slightly above.

The holiday shopping season, Amazon's crucial period for retail revenue, falls in the fourth quarter. Shareholders will watch the earnings call for explanations of the EPS miss, the prospects for AWS growth and capital expenditure, and the reasoning behind the large profit guidance range.