Huge Silver Linings Underneath Amazon and Apple Earnings “Disappointments”


Shareholders in Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) didn’t have a great earnings season, as both companies fell around 2% the day after their respective third quarter reports. Those drops also came on the heels of year-to-date underperformance from each stock relative to the S&P 500 — a rare off year for each.

So have these two juggernauts run out of steam? Not likely. In fact, both stocks were down much more immediately after the reports before recovering some of Friday’s losses. That’s probably because as investors dove into the details around each report, they were likely to find a big silver lining for each.

Cloud shaped keychain with smiley face on it.

Amazon’s cloud computing strength helped offset retail weakness. Image source: Getty Images.

Amazon: Headwinds in retail, but cloud computing is taking off

Amazon missed on both revenue and earnings estimates, and its Q4 guidance came in below expectations as well. The core retail business is currently plagued by supply chain and labor shortages, which are hurting not only on the revenue side but also on the cost side. This was also the first full quarter since vaccines were widely available, and U.S. consumers clearly began to venture outside for shopping more and more.

Against difficult comparisons, Amazon still posted year-over-year growth in its online stores, which were up 3%, and third-party seller services were up 18%. But labor shortages caused signing bonuses to rise, and Amazon is also continuing to build a massive amount of capacity as it looks to complete its one-day delivery project begun in 2019. That caused earnings to decline by about half relative to last year.

But performance at Amazon Web Services was a huge plus. While the e-commerce business still accounts for most of Amazon’s revenue, AWS is arguably Amazon’s most valuable business because of its high profit margins and high growth. Last quarter, AWS posted fantastic numbers: Revenue accelerated 39%, up from 37% growth in the second quarter and 29% in the year-ago quarter. AWS operating margins also expanded by two percentage points over the prior quarter to 30.3%, showing impressive operating leverage.

So while Amazon’s headline numbers came…

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