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Why Caused Amazon’s Revenue Miss?

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Amazon stumbled in 4Q16

Amazon (AMZN) had a mixed performance in 4Q16, missing its revenue estimate and beating its EPS (earnings per share) estimate. Additionally, the company’s cloud computing business, AWS (Amazon Web Services), failed to live up to revenue expectations despite becoming a major growth engine for the company.

In 4Q16, revenue rose 22% YoY (year-over-year) to $43.7 billion, missing the consensus estimate for revenue of $44.7 billion. However, with EPS of $1.54, Amazon easily beat the consensus estimate of $1.35. AWS revenue rose 47% to $3.5 billion but fell short of the $3.6 billion Wall Street was expecting.

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Strategy shift slows top-line growth

Amazon didn’t explain the cause of the top-line miss, but analysts weighing in on the development, such as R.J. Hottovy of Morningstar, cited the company’s shift to a third-party marketplace as a possible cause of the revenue miss in 4Q16. As for Amazon’s cloud business, fierce competition from Microsoft (MSFT), Oracle (ORCL), IBM (IBM), and Alphabet (GOOGL) may have limited AWS sales opportunities in 4Q16.

Prime membership continues to grow

In what signals a bright future for Amazon, CEO Jeff Bezos said tens of millions of customers joined the Prime program in 2016. He added that Prime subscribers can now select from more than 50 million items, 73% more than the year prior.

Prime members spend significantly more on Amazon shopping than non-members. Therefore, if Amazon succeeds in getting more customers to subscribe to the Prime program, the company could see a sharp spike in its retail sales. Amazon has been adding more features to the Prime program, such as original video content, to make it more appealing to shoppers.

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