October 25, 2019 / 1:19 PM / a month ago

Amazon sales forecast, slower cloud growth disappoint investors

(Reuters) - Shares of Amazon.com Inc were down 3% on Friday, as investors were let down by a lower-than-expected sales outlook and surprised by slower revenue growth at its lucrative AWS cloud business.

FILE PHOTO: Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016. REUTERS/Mike Segar/File Photo

As many as 16 brokerages cut their price targets on the stock, with many saying higher costs to keep its one-day delivery Prime members happy played a big part in weaker profits.

“Going forward, it is difficult to assess when Amazon will once again begin to deliver profit upside. We think that the buildout of next day delivery is likely to take several quarters, and don’t expect a return to outsized profits anytime soon,” said Wedbush Securities analyst Michael Pachter.

Amazon’s median price target is $2,220, a 33% premium to where its shares are indicated to open. The shares are trading down at $1,734.70.

Interactive graphic on Amazon's profit: here

Amazon was again hurt by heavy investments to speed up deliveries to its Prime members as it tries to beat back Walmart Inc, which is swiping market share.

Amazon expects costs to cater to Prime members to nearly double to $1.5 billion during the holiday season from what it spent on one-day delivery during the second quarter.

The company reported sales growth of 24% to $70 billion in the third quarter, but its prediction of $80 billion to $86.5 billion sales in the fourth quarter fell short of the $87.4 billion analysts were expecting, according to IBES data from Refinitiv.

Holiday sales typically pull in a major share of retailers’ revenue and profit.

Interactive graphic on Amazon's holiday quarter: here

Amazon also disappointed on slower revenue growth for Amazon Web Services, the company’s traditionally lucrative cloud business.

Daniel Liu, research analyst at Canalys, said Microsoft Corp’s Azure cloud business narrowed its gap with AWS during the third quarter. AWS accounts for nearly a third of the global cloud market.

AWS revenue grew by 35% year-on-year and came in slightly below Microsoft’s Commercial Cloud revenue growth of 36%, according to Shebly Seyrafi, CFA Managing Director, Technology & Internet Research at FBN Securities . 

Interactive graphic on Amazon's cloud business: here

Most analysts, however, stood by Amazon’s long-term prospects.

Nicholas Hyett, equity analyst at Hargreaves Lansdown said Amazon’s revenue continues to grow at an astonishing, and for rival retailers probably alarming, rate, adding that robust cash generation meant that Chief Executive Officer Jeff Bezos would be unfazed.

FILE PHOTO: A delivery person pushes a cart full of Amazon boxes in New York City, U.S., February 14, 2019. REUTERS/Brendan McDermid/File Photo

“Whether all the extra investment will be worth it in the end is perhaps open to question, especially given the lackluster sales guidance for next quarter. But it’s been foolish to doubt Amazon in the past,” Hyett said.

Interactive graphic on Amazon's costs: here

Reporting by Noor Zainab Hussain, Uday Sampath and Ambhini Aishwarya in Bengaluru; Editing by Bernard Orr

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