(Reuters) - Amazon.com Inc on Thursday forecast revenue and profit for the holiday quarter below expectations, as it faces fierce competition and rising costs from its plan to speed up delivery times globally.
Shares fell 7%, as revenue growth for the company’s lucrative cloud computing business also slowed down in the third quarter, missing analysts’ estimates. Amazon beat expectations on overall third-quarter revenue, posting a sales rise of 24% to $70 billion.
The news underscores the big investment Amazon is making to cut delivery times to one day for its Prime loyalty members, a way to outmaneuver rivals such as Walmart Inc that have marketed two-day shipping without subscription fees.
Costs for that program will nearly double to $1.5 billion during the holiday season, from what Amazon spent on one-day delivery during the second quarter, the company’s Chief Financial Officer Brian Olsavsky said on a call with analysts.
Expenses rose because the company has to move inventory closer to customers and beef up its last-mile transportation footprint to make the plan work, Olsavsky said. The company also is giving up the fees that shoppers used to pay for one-day shipping and is still learning what the long-term cost structure of the program will be, he said.
Amazon’s rising headcount reflects its delivery ambitions. It hired nearly 100,000 full and part-time workers in the third quarter, bringing its staff size to over 400,000 in the United States and 750,000 globally.
“By and away the biggest driver this time is the people that we’re adding for fulfillment and transportation roles,” Olsavsky said.
Still, Amazon is betting that fast shipping will spark sales growth, a strategy that over years has helped it become the world’s largest online retailer.
“Amazon will not necessarily be spooked by the increase in costs,” said Neil Saunders, managing director of research firm GlobalData Retail. “Indeed, it sees the higher shipping expense as an investment in the Prime platform and as a way to retain the loyalty of its shoppers.”
Amazon said earlier this year that it now delivers some 10% of its 100 million-plus Prime-eligible goods in one day in the United States. The Seattle-based company did not provide an updated number on Thursday.
Weak holiday quarter guidance has added to worries that the U.S.-China trade spat may be hurting the U.S. retail industry, and that one-day shipping might not be as big a boost as Amazon anticipates.
There was “hope that this investment would lead to a further revenue acceleration in the holiday quarter, whereas the company has guided to the opposite,” said Atlantic Equities analyst James Cordwell.
Holiday sales typically generate a large share of retailers’ revenue and profit. Amazon’s forecast of $80.0 billion to $86.5 billion in sales came short of $87.4 billion that analysts were expecting, according to IBES data from Refinitiv.
The company also said it expects holiday-quarter operating income to be between $1.2 billion and $2.9 billion, while analysts were expecting $4.19 billion, according to research firm FactSet.
Olsavsky attributed some of the weakness to the timing of events outside the United States, which pushed revenue into the third quarter. For instance, the company saw customers in Japan pre-order goods before a rise in consumption tax went into effect on Oct. 1, he said.
Olsavsky declined to comment to reporters on regulatory scrutiny the company is facing over alleged foul play with merchants on its platform, saying later that the company only succeeds if its sellers succeed. Sales such as fulfillment services for merchants, as well as ad and other sales to merchants, beat analysts’ estimates in the third quarter.
Olsavsky also downplayed concerns about a slowdown in growth for one of the company’s profit centers, Amazon Web Services (AWS). The unit, which handles data storage and computing operations for other enterprises, increased revenue 35% to $9.0 billion, the second quarter in a row in which its rate of growth was under 40%.
“It’s hard to predict the pace of some of the sales cycles and the enterprise migrations that companies are willing to make,” he said. “But we are having great success, and we’re adding a lot (to) the sales force.”
Not all analysts saw a risk-free future, particularly as the unit’s operating expenses jumped 46% to $6.7 billion in the third quarter. Operating income was $2.3 billion.
“The ‘problem’ is spending,” Wedbush Securities analyst Michael Pachter said. There is “a lot of investment in AWS infrastructure... The company makes these investments without really explaining them in detail, and investors are left on their own trying to figure out when Amazon will start delivering outsized profits again.”
Reporting by Akanksha Rana in Bengaluru and Jeffrey Dastin in San Francisco; Editing by Saumyadeb Chakrabarty and Lisa Shumaker