Decent 3Q print with revenue in line with our expectation and gross profit ahead, while SG&A put EBIT moderately below our model. We got incrementally bearish on AMZN since the 2Q print given the more bearish TREND setup expecting a revenue deceleration and profit pressure in 4Q. 3Q saw great revenue and gross profit trends aided by the 400bps help from the shift in Prime Day. Still total revenue accelerated to +19% from 10% last Q. North America and International both accelerated more than 1000bps in constant currency. AWS was the weakest point from a rate of change perspective as revenue slowed nearly 600bps to +27.5% and management noted that the quarter ended closer to mid-20s, suggesting we’ll see another slowdown in 4Q. AWS margins also compressed 400bps yy as AMZN works with customers looking to control costs, so pricing saw some pressure.
The guide was weak for sure, spot on with what we were expecting. Management sounded slightly on the defensive on the call, a rare occurrence for AMZN. Though that could be because the CFO is the main voice on the call, and there is cost management problem for Amazon relative to demand trends. The CFO was clear that they have work to do on getting the cost structure under control. It doesn’t sound like major cost cuts are in the plan for 4Q, as the company focuses on delivering for customers, but it sounds like in 1Q23 they might be looking to cut some around corporate and excess fulfillment. Cleary over the TREND demand is under pressure, and costs need work to get under control. As for the overall outlook, the TREND is net bearish with slowing revenue gross profit and EBIT into 4Q, but the one upside is the magnitude of the decline could mean we’re near a trough rate of change. We’re not making that call yet, as we think the consumer comes under further pressure in the coming months, but the worse the slowdown in 4Q, the more probable a 1Q acceleration becomes.
We’ll see how it trades in the open market, but the initial aftermarket drop was somewhat surprising to us. The market should have been expecting a weak guide, especially after the results of the other mega cap names this week. Not to mention the previous hiring freeze at AMZN Retail operations. That was a clear sign that cost growth was far outpacing the demand expectations that management had. On a TAIL fundamental outlook, we’d still be comfortable owning AMZN, but on the TREND duration with still several Quad4s ahead and a continually slowing consumer we’re not buyers yet.
Ecosystem Callouts
The big callouts this quarter are the macro reads from Amazon…
Corporates: AWS customers are looking to cut costs, meaning corporate America has earnings risk (not a shocker).
Europe Weak: “But it was mostly in international where we saw the biggest impact, and we think that is tied to a tougher recessionary environment there. Compared to the U.S., it's worse in Europe right now. The Ukraine war and the energy crisis issues have really compounded in that geography”
The US consumer. “we're realistic that there's various factors weighing on people's wallets, and we're not quite sure how strong holiday spending will be versus last year. And we're ready for a variety of outcomes” Amazon is seeing slowing trends, its cautious around holiday demand, yet its also positioned very well in terms of in stocks and fulfillment times to compete aggressively in holiday. Holiday 2022 will be a dog fight, and while we think the consumer stretches to spend and deliver holiday to their families, promos will be up, and whether there is anything left for 1Q discretionary spend gets dicey.
Slower Investment: For the first time we can remember AMZN is curbing investment instead plugging in more to take share. That’s maybe a good thing in a way from a competitive perspective, but it is a very bearish read for aggregate demand trends given AMZN probably has the best data set in understanding the US consumer mindset in existence.
