Inflation and other macroeconomic concerns are expected to negatively impact Amazon.com Inc.'s holiday sales in the fourth quarter, while growth rates for the company's highly profitable cloud-computing unit will continue to decline as customers cut back on IT expenses.

Amazon's lackluster third-quarter earnings report comes as online sales for the e-commerce company have slowed over the past year, reflecting renewed consumer interest in in-person shopping. Amazon's report rattled investors who sent the company's stock down by nearly 20% in after-market trading Oct. 27.

The company's third-quarter net sales reached $127.10 billion, up 14.7% from $110.81 billion in the year-ago period. Amazon's third-quarter revenue was slightly below analysts' expectations of $127.47 billion, according to S&P Capital IQ estimates.

Amazon's net income decreased to $2.87 billion in the third quarter, or 28 cents per share, compared with $3.16 billion, or 31 cents per diluted share, in the third quarter of 2021.

AWS slowdown

Sales for Amazon Web Services Inc. were $20.54 billion during the third quarter. While this represented a 27% increase year over year, the growth rate was markedly slower than past quarters as customers pulled back on spending.

Arun Sundaram, senior analyst with CFRA, said shareholders sold off shares as part of a direct reaction to the slowdown in sales for AWS, which has been growing at a fast clip over the past few years.

"This is the first quarter where we really started to see a slowdown with AWS; I think investors were sort of bracing for this moment and knew it was going to come eventually," Sundaram said. "The expectation is that the deceleration in AWS will continue in 2023."

Sundaram said Amazon is not losing AWS customers but is working with clients in areas such as mortgage financing and cryptocurrency that have experienced a large slowdown and become more cost focused. "They are saying, 'can you work with us to give us some lower-priced options?'" the analyst said.

Online shopping

Online store sales grew 7%, an improvement from the first half of the year when Amazon's online sales fell, Sundaram said.

But Tom Forte, managing director with D.A. Davidson, said e-commerce sales will be softer in the fourth quarter as consumers spend more on so-called "revenge travel," where consumers travel more to make up for time lost during the pandemic. Additionally, consumers will continue to spend more on essentials such as food due to inflation.

Amazon CFO Brian Olsavsky said in an earnings conference call on Oct. 27 that the company saw moderating sales growth across many of its businesses in the third quarter due to a challenging macroeconomic environment. "The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend," Olsavsky said.

Olsavsky said he expects these impacts to persist throughout the fourth quarter as inflation-conscious consumers pull back on spending.

Fourth-quarter net sales for the company are expected to be between $140 billion and $148 billion, up between 2% and 8% compared with fourth quarter 2021.

Amazon is being "realistic that there's various factors weighing on people's wallets, and we're not quite sure how strong holiday spending will be versus last year," Olsavsky said. "We're ready for a variety of outcomes."

Back to stores

Consumers are also expected to spend a good portion of their holiday dollars in stores. According to preliminary data from 451 Research's "Connected Customer, Fintech and Holiday Experience 2022/2021" survey, 53% of respondents who plan to holiday shop will do most of their shopping online versus 46.7% who plan to mostly shop in stores.

While the fourth quarter will likely be challenging on the e-commerce side, Amazon's margins could improve in 2023 due in part to the company's pullback on e-commerce investments, warehousing network and staffing, said CFRA's Sundaram. "Even if the top line growth does slow, the bottom line should still grow in 2023 versus 2022," Sundaram said.

Sundaram expects AWS margins to return to the mid- to high-30% range if cloud adoption accelerates after the economic downturn.

451 Research is part of S&P Global Market Intelligence.