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Amazon Earnings a Take Huge Hit in Q3 2021

Compared to Q3 2020, but 2020 was not a typical year

The third quarter was a rough one for Amazon earnings. The company had net sales of $110.8 million, representing a 15% increase over the third quarter of 2020, but Amazon’s net income took a huge hit. The company’s net income for the quarter ended September 30, 2021 was $3.2 billion, a decrease of $3.1 billion over the same period last year. This equates to earnings of $6.12 per diluted share for the third quarter of 2021, compared to $12.37 per diluted share for the third quarter of 2020.

Short-term profits not the priority now

This was the first complete quarter under new CEO Andy Jassy’s leadership. Though not addressing the earnings drop directly, the CEO alludes to the company’s investments as the reason for the huge decrease. It is a question of priorities.

“We’ve always said that when confronted with the choice between optimizing for short-term profits versus what’s best for customers over the long term, we will choose the latter—and you can see that during every phase of this pandemic,” said Jassy in an October 28, 2021 news release. “In the first several months of COVID-19, Amazonians played an essential role to help people secure the requisite PPE, food, and other in-demand items needed, and we worked closely with businesses and governments to leverage AWS to maintain business continuity as they responded to the pandemic.”

“Customers have appreciated this commitment, which is part of what’s driving this past quarter’s AWS growth acceleration to 39% year over year; but, it’s also driven extraordinary investments across our businesses to satisfy customer needs—just one example is that we’ve nearly doubled the size of our fulfillment network since the pandemic began,” Jassy added.

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs—all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners,” said Jassy.

Quarterly financial highlights

Financial highlights for the third quarter include:

  • Net product sales were $54.9 billion, compared to $52.8 billion in Q3 2020.
  • Net service sales were $55.9 billion, compared to $43.4 billion in Q3 2020, indicating that net service sales for the quarter were higher than net product sales.
  • Total net sales were $110.8 billion, compared t $96.1 billion in Q3 2020.
  • Total operating expenses were $106.0 billion, compared to $90.0 billion in Q3 2020.
  • Cash, cash equivalents and restricted cash at the end of the period was $30.2 billion.

Operational highlights

  • On October 4, just after the end of the quarter, Amazon kicked off its Black Friday-worthy deals along with new features, including the Holiday Gift List and Holiday Prep Shop.
  • Amazon expanded its same-day delivery service to Atlanta, Baltimore, Charlotte, Chicago, Detroit, Houston, Miami, Minneapolis and Tampa. The service, which launched last year, is now available in 15 cities.
  • Amazon launched a new gift giving feature for easy, stress-free gift giving through their mobile app.
  • Amazon focused on international ecommerce, including launching the Great Indian Festival featuring 75,000 small businesses from 450 cities across India on October 3. They also launched Amazon.eg in Egypt, replacing Souq.com.
  • Amazon Games launched New World, a multiplayer online PC game that has already become the highest-played new game this year on Steam in terms of hours watched.
  • Amazon Music launched new original podcasts, including SmartLess, Set It Straight and Badlands; streamed its first Union of European Football Associations Champions League soccer matches in Germany and Italy; kicked off Thursday Night Football; and released Cinderella, an Amazon Original movie.
  • Amazon announced and/or released new Amazon devices and services including the Echo Show 15, new Fire TV devices, home robot Astro and Alexa Together.
  • AWS net sales were $16.1 billion, compared to $11.6 billion in Q3 2020, due to new or expanding relationships with NXP, Wyndham Hotels & Resorts, Boingo Wireless, Sun Life, Baxter International and Arctic Wolf Networks.
  • Amazon announced it will pay full college tuition, as well as the costs to earn high school diplomas, GEDs, and English as a Second Language proficiency certifications for front-line employees in the U.S. through the company’s Career Choice program. More than 750,000 employees will be eligible for the program starting in January.
  • Amazon plans to hire for 150,000 seasonal jobs in the U.S., more than 50,000 in Europe and more than 110,000 in India. In the U.S., average starting pay is $18 an hour, plus incentive shift pay and sign-on bonuses.
  • Amazon was named the fourth top employee on Forbes’ World’s Best Employers list for 2021.
  • Amazon donated more than 1 million emergency supplies to help those affected by Hurricane Ida and an earthquake in Haiti.
  • Amazon launched Black Business Accelerator Connect and teamed up with Lendistry to launch Amazon Community Lending to provide Amazon sellers in the U.S. with access to short-term loans.
  • Eighty-six new companies have joined The Climate Pledge, including HP, Procter & Gamble and Salesforce, bringing the total to over 200 companies that pledge to achieve net-zero carbon emissions by 2040.
Image courtesy of Amazon

Fourth quarter outlook

Amazon provided the following guidance for the fourth quarter of 2021:

  • Net sales of $130.0 billion to $140.0 billion, representing year-over-year increases between 4% and 12%
  • Operating income between $0 and $3.0 billion, compared to $6.9 billion in Q4 2020
  • The guidance assumes no material changes such as acquisitions.

Insider Take

While Amazon missed revenue and earnings predictions by analysts, in terms of revenue, Amazon saw 15% growth. Considering supply chain issues and the ongoing pandemic, that growth is impressive. They did, however, see an enormous decrease in net income. This caused some investors to panic and Amazon’s stock price to go from $3,446.57 on October 28 to $3,372.41. While this makes for good media headlines, it isn’t as sensational as it initially sounds, and it isn’t indicative of any long-term trends.

First, Amazon is making huge investments to help improve its part of the supply chain, including logistics and fulfilment, and second, the third quarter of 2020 saw a huge spike.

Q3 2020:

Net sales = $96.1 billion
Net income = $6.3 billion

Q3 2019:

Net sales = $70.0 billion
Net income = $2.1 billion

So, yes, there was a huge drop in net income between 2020 and 2021, but the ship is just righting itself. There isn’t really anything unusual when we remember that 2020 was not a typical year for any business. If we compare 2021 net income ($3.2 billion) to 2019 net income ($2.1 billion), Amazon is probably right on track.

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