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Here’s Why Amazon.com, Inc. (AMZN) Posted Lower Than Expected Q3 Profits

Amazon.com (AMZN) Amazon

Amazon.com, Inc. reported a lower-than-expected quarterly profit as the online retailer invested heavily on its shipment and delivery services. Shares of the company fell more than 6% in after-market trading Thursday after it reported its lowest quarterly profit and provided a disappointing revenue forecast for the fourth quarter.

For the third quarter ended September 30, the e-commerce giant reported net income of $252 million, or 52 cents per share, up from $79 million, or 17 cents per share, in the same quarter a year ago. But analysts had expected earnings per share of 78 cents for the third quarter. Sales rose 29% to $32.7 billion in the third quarter, versus $25.4 billion in the same quarter last year. Operating income was $575 million, up from $406 million in the third quarter last year.

Amazon One AMZN Prime Air

Operating Expenses Up 31.5% in Q3

Time reported that total operating expenses increased by 31.5% to $10.94 billion. This makes sense as the online retailer invests in Amazon Web Services, expands its Prime program internationally, builds up its warehouse and delivery infrastructure, and boots its original video offerings.

The company in July said that customers placed 60% more orders worldwide in its second Prime Day sale. The company reported a 55% increase in revenue from Amazon Web Services to $3.23 billion, versus the average estimate of $3.19 billion, according to market research firm FactSet StreetAccount.

For the fourth quarter, Amazon expects sales to be in a range of $42.0 billion and $45.5 billion, or to grow between 17% and 27% compared with the fourth quarter of 2015. The guidance anticipates approximately 60 basis points of favorable impact from foreign exchange rates.

The company expects operating income to be between $0 and $1.25 billion, compared with $1.1 billion in fourth quarter last year.

Amazon Invested Heavily To Trim Delivery Times

The Wall Street Journal reported that Amazon.com, Inc. reported a lowest quarterly profit because it heavily spent to meet consumer demand for more orders delivered faster.

The e-commerce giant is hiring more workers, building more warehouses, launching in foreign countries, as well as the company is experimenting with various shipping and delivery options.

Amazon said that its expenses soared in the third quarter due to new warehouses and shipping items with shorter delivery times. The company opened 23 warehouses world-wide to fill orders since July. The company expects that its investments on the delivery network will continue through the rest of the year.

Chief Financial Officer Brian Olsavsky said in a media call that adding new warehouses “was a big undertaking.” He believes that that new warehouses will allow the company to handle the flood of holiday orders in the fourth quarter.

Amazon also launched its first-ever branded cargo plane, the Amazon One. The aircraft is a Boeing 767-300 plane and is part of 40 cargo airplanes that Amazon leased from Atlas Air and ATSG in order to strengthen its delivery network.

Robert W. Baird & Co. analyst Colin Sebastian said that it looks that “Amazon is still in investment mode, and the Street should not necessarily expect linear growth in profitability.”

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    Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.

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