Why Amazon Missed Its Earnings Estimate by a Mile

Amazon (AMZN) announced its fiscal 2Q17 results on Thursday, July 27. The e-commerce giant revenues beat Wall Street estimates but fell well short on earnings, as it continued to invest in areas of growth.

EPS came in at $0.40 per share, the smallest quarterly profit in two years­­ as compared to estimates of $1.42 per share, a 77% decline from the corresponding quarter last year. Revenues came in at $38.0 billion as against analysts’ estimates of $37.2 billion. Revenues rose 25% from the corresponding quarter last year.

The reason behind this huge earnings miss is the company’s expenditure on new warehouses and data centers for its cloud services business, as well as recruiting new employees to work on its AI (artificial intelligence) service.

The Seattle-based e-retailer indicated the investment is likely to continue, as it gave fiscal 3Q17 operating income guidance in the range of a $400 million loss to a $300 million profit. Amazon is on a hiring spree and plans to hire up to 50,000 employees in 12 American cities next month.

Investors remain patient as they feel Amazon’s expenditures may reward them in the long term. For the time being, however, the stock fell nearly 4%. The fall creates some value for the stock, which has posted gains of 40% YTD.

The company’s cloud segment, AWS, once again seemed to be the engine of its profitability. Amazon Web Services (or AWS) saw its revenue rise 42% in 2Q17 from the corresponding quarter last year. That growth has slowed down a bit. AWS saw growth of 58% between 2015 and 2016.

The company continues to bulldoze its way into new businesses. Amazon took over Whole Foods (WFM) in a $13.7 billion deal last month. It also launched new Echo devices and is now the leader in the home voice assistant segment.