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Amazon Q3 - Investing in Delivery Speed

On Thursday night after the market closed, Amazon reported its Q3 numbers. It reported revenue of $70 billion, growing by 24% and beating estimates by $1.3 billion. On a profit side, EPS was $4.23, missing estimates by $0.26. Lastly, the guidance for their final and biggest quarter of the year was less than expected. Once the results hit the street, the Amazon share price dropped 9% in after hours trading. Thankfully, once investors had a chance to dwell on the results and have a good night sleep, things didn't look as bad on Friday morning. When the stock closed on Friday evening it was down 1%.

Amazon has always said that they are not focused on short-term profits, and that is something that investors need to remember when looking at the latest set of results. The main reason that EPS was lower than expected is that Amazon is pushing hard to increase one-day shipping. Setting up the systems and relationships to do something as amazing as one-day shipping does not come cheap. By improving shipping times, Amazon is doing two things. The first is that they appeal to a wider customer base by including those people who are more time sensitive with their orders. The second thing Amazon is doing is growing the moat between themselves and the competition. Spending short term profits for long term gain sounds like a good plan to me.

A good indicator that things are going well is that revenue is growing at 24%. As long as revenues are growing quickly, you don't have to worry as much about profits. When Jeff and the team finally feel that they have done enough building of shipping capacity, then instead of them buying new warehouses the money will flow to shareholders. The greater the revenue number when that happens, the greater the profits will be. The goal is to have patience and trust the management team.

Here is a parting shot from the latest Goldman Sachs research report on Amazon - "we continue to believe AMZN (Amazon) represents one of the best risk/rewards in Internet".


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