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Cramer Backs Amazon’s Bet on Free One-Day Delivery

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Amazon (AMZN) stock slid 1.1% on October 25 after the company reported lower-than-expected third-quarter earnings. Moreover, investors were disappointed with its weak fourth-quarter outlook. The e-commerce titan announced its third-quarter results after the markets closed on October 24.

Amazon’s third-quarter sales grew 23.7% to $69.98 billion, beating analysts’ estimate of $68.81 billion. However, the company’s third-quarter EPS declined 26% to $4.23. This EPS stood far behind analysts’ forecast of $4.62. Higher shipping costs and marketing expenses impacted its third-quarter earnings.

Despite the company’s disappointing results, CNBC host Jim Cramer is bullish on Amazon. During the Squawk on the Street show, Cramer advised investors to buy Amazon this week once the sell-off in the stock is over.

Cramer supports Amazon’s investments in one-day delivery

Cramer believes that Amazon is doing the right thing by investing in one-day delivery, as that is what its Prime customers want. In the company’s third-quarter earnings press release, Amazon CEO Jeff Bezos indicated that Prime customers welcomed the transition to one-day delivery from two-day delivery.

The company announced its free one-day shipping program for its Prime customers in April. In June, it disclosed the expansion of its free one-day delivery service on more than 10 million products.

After investing over $800 million in one-day delivery in the second and third quarters, Amazon has geared up for even greater spending in the fourth quarter. During its third-quarter conference call, the company disclosed its plan to invest $1.5 billion in the fourth quarter to service its one-day delivery facility.

Aside from investing in one-day delivery, Amazon plans to enhance the consumer shopping experience by adding pickup points. Recently, the company announced the addition of various locations at GNC, Health Mart, and Stage Stores, where customers can pick up their purchases.

Amazon rivals also capturing online sales

Amazon’s rivals in the retail space are also investing in faster delivery to attract customers. In May, Walmart (WMT) rolled out its free NextDay delivery for online orders of $35 or more. At the end of Q2, Walmart offered grocery pickup in 2,700 locations and same-day grocery delivery services at 1,100 locations. It plans to expand its grocery pickup services to 3,100 stores and same-day grocery delivery service to 1,600 stores by the end of 2019.

In June, Target (TGT) announced a same-day delivery option for online shoppers at $9.99 per order through its Shipt platform. During its second-quarter conference call on August 21, Target noted that sales through its same-day fulfillment facilities of in-store pickup, drive-up, and Shipt have doubled.

Amazon’s rapidly growing sales have disrupted the business of traditional retailers over the past few years. Aside from Walmart and Target, department stores like Macy’s (M) are investing in their online channels to combat the threat from online retailers.

In its second quarter of fiscal 2019, Macy’s digital business delivered double-digit growth for the 40th consecutive quarter. However, Credit Suisse downgraded Macy’s stock as heightened competition and weakness in physical store sales acted as headwinds on its growth. Overall, investments in faster delivery by Amazon and other retailers should impact their margins.

Holiday season forecast

Amazon expects its fourth-quarter sales to rise 11%–20% to $80.0 billion–$86.5 billion. Its holiday season sales estimate fell short of analysts’ estimate of $87.37 billion. The company’s sales growth outlook takes into account an adverse impact of 80 basis points due to foreign currency fluctuations.

Amazon forecasts its fourth-quarter operating income to reach $1.2 billion–$2.9 billion. This guidance marks a decline compared to its operating income of $3.8 billion in the fourth quarter of 2018. Continued investment in infrastructure to support faster delivery and higher marketing spending would likely impact its profitability in the fourth quarter.

Analysts expect Amazon’s fourth-quarter sales to rise 18.7% to $85.9 billion. They expect its fourth-quarter adjusted EPS to decline 32.8% to $4.06.

Do analysts see upside in Amazon stock?

On October 25, 48 analysts had “buy” recommendations for Amazon stock while one had a “hold” rating. Several analysts lowered their price targets for Amazon stock following its third-quarter results. At the end of the day on October 25, Amazon stock had risen 17.3% year-to-date.

Last week, Amazon lagged the 20.6% year-to-date rise in the S&P 500. In comparison, Walmart (WMT) and Target (TGT) shares were up 27.8% and 65%, respectively.

Currently, the average 12-month price target for Amazon stock is $2,187.56. This estimate implies an upside of 24%.

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