Amazon (Nasdaq: AMZN) acquired 460-store Whole Foods Grocery chain for $13.6 billion last quarter and is now expanding its physical presence across the country. It is also expanding its international reach and its video and music offerings. But first, let us look at its strong third-quarter earnings, which surpassed all expectations.
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Amazon’s third-quarter revenues grew 34% over the year to $43.7 billion, ahead of the market’s expectations of $42.2 billion. Net income increased slightly to $256 million or $0.52 per share crushing analyst estimates of $0.04 per share.
Its operating margins continued to fall from 1.8% a year ago to 0.8% in the quarter. Cost of sales grew 30% to $27.5 billion, fulfillment expenses grew 49% to $6.4 billion, marketing expenses grew 42% to $2.48 billion, and technology and content spend grew 46% to $5.9 billion.
By segment, net product sales increased 29% to $28.77 billion and net service sales increased 44% to $15 billion.
AWS continues to drive its profitability and generated operating income of $1.17 billion in the quarter. AWS revenues grew 42% over the year to $4.58 billion or about 10% of total revenue and beat estimates of $4.5 billion. AWS owned 30% of the cloud infrastructure market in the second quarter, more than double Microsoft Azure’s market share of 14%.
Revenue from subscription services like Prime increased 59% to $2.4 billion. Revenue from online stores grew 22% to $26.4 billion while revenue from physical stores, chiefly from its stores from the Whole Foods acquisition, was $1.28 billion. Revenue from third party seller services including commission, fulfillment, and shipping fees grew 40% to $7.93 billion.
For the fourth quarter, Amazon expects sales to grow 28%-38% to $56-$60.5 billion. Operating income for the quarter, including shopping holiday Black Friday and winter holidays, is expected to be $300 million-$1.65 billion. Analysts estimate operating income of $1.55 billion on sales of $58.8 billion.