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Amazon investors weigh profit miss versus future growth

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Employees stand near an The Amazon logo in Hyderabad, India, on Sept. 6, 2019. Bloomberg photo by Dhiraj Singh.

For years, Amazon.com has trained shareholders to focus on the long term, persuading them that the company needs to keep spending to fuel growth and stay ahead of rivals such as Walmart.

But investors were jolted -- at least momentarily -- when Amazon said Thursday that it was spending more than expected on an ambitious effort to get products from warehouse to doorstep in a single day. The company posted its first year-over-year quarterly profit decline since early 2017.

Wall Street blinked and the shares sank about 9% after the results were released but recovered some of those losses early Friday. The shares were down 4% as the market opened.

During an analyst's call Thursday, Chief Financial Officer Brian Olsavsky said the costs of the company's one-day delivery push will total some $1.5 billion during the holiday quarter. That prompted Amazon to project operating income and sales in the period that fell short of analysts' estimates. Slowing growth in Amazon Web Services, the profit-generating cloud division, also gave Wall Street pause.

The question, as so often with Amazon, is whether investors will calm down once they've digested the earnings report. Already on Friday, analysts were sounding bullish on the company's long-term prospects.

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"With revenue growth accelerating for the second quarter in a row and a strong history of the company's investments in fulfillment and infrastructure driving faster growth and high returns we continue to believe Amazon represents one of the best risk/rewards in internet," Goldman Sachs analysts lead by Heath Terry wrote in a note to investors. The firm rates the stock a buy, but lowered its price target to $2,200 from $2,350.

Chief Executive Officer Jeff Bezos has promised since the company's initial public offering to invest for the long haul, and he is proving again his willingness to endure a little short-term pain in a bid to expand. Facing slowing growth in its core e-commerce franchise in recent years, Amazon in April announced an initiative to cut the delivery window on millions of items for paying members of its Prime subscription program.

"Customers love the transition of Prime from two days to one day - they've already ordered billions of items with free one-day delivery this year," Bezos said in a statement. "It's a big investment, and it's the right long-term decision for customers."

The effort has helped reinvigorate sales, if at a high price. Global shipping costs soared 46% in the third quarter to $9.6 billion as the company offers one-day delivery on more Prime items. Indeed, online store sales rose 21% in the same period.

Amazon isn't only spending on shipping. Olsavsky said the company continues to build out software development and sales and marketing teams for the Amazon Web Services cloud computing unit, and hire for roles supporting its devices business, streaming video unit and international operations.

The retail giant said Thursday that profit fell 28% to $2.1 billion in the third quarter, reflecting the higher spending, but revenue rose 24%, a second consecutive increase, to $70 billion.

Amazon's costs for technology and content -- largely salaries related to employees in research and development and infrastructure for AWS data centers -- jumped 28% to $9.2 billion. The company's total workforce increased 22% to 750,000.

Still, AWS's growth was the slowest since Amazon began breaking out the unit's performance.

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That was "absolutely" a concern for investors, said Tom Forte, an analyst at DA Davidson & Co. Amazon, which had a lengthy head start in building out a cloud-computing platform, faces steep competition now from well-funded rival offerings like Microsoft Corp.'s Azure and Google's Cloud Platform.

While many analysts lowered their price target for Amazon shares, most of them saw the stock dip as a buying opportunity.

UBS analysts said they weren't "surprised with the initial negative stock reaction," and said "investors with a long-term horizon out to 2020 should view this result as a positive with Amazon clearly making investments against long-term objectives -- a paradigm that has historically yielded a much higher stock price once fully digested by investors."

Related Topics: AMAZON
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