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Amazon shares fell the day after a lower-than-expected sales outlook.

Clodagh Kilcoyne/Reuters

Shares of Amazon.com Inc. fell as much as 6 per cent in early trading before closing down 1 per cent on Friday, as investors were let down by a lower-than-expected sales outlook and surprised by slower revenue growth at its lucrative AWS cloud business.

As many as 16 brokerages cut their price targets on the stock. Analysts said higher costs to keep its one-day delivery Prime members happy played a big part in weaker profits.

“Going forward, it is difficult to assess when Amazon will once again begin to deliver profit upside. We think that the buildout of next day delivery is likely to take several quarters, and don’t expect a return to outsized profits anytime soon,” said Wedbush Securities analyst Michael Pachter.

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Amazon’s median price target is US$2,220, a 33-per-cent premium to where its shares are indicated to open.

Although sales rose 24 per cent to US$70-billion in the third quarter, its prediction of US$80-billion to US$86.5-billion sales in the fourth quarter fell short of the US$87.4-billion analysts were expecting, according to IBES data from Refinitiv.

Amazon was again hurt by heavy investments to speed up deliveries to its Prime members as it tries to beat back Walmart Inc., which is swiping market share.

Amazon expects costs to cater to Prime members to nearly double to US$1.5-billion during the holiday season from what it spent on one-day delivery during the second quarter.

Holiday sales typically pull in a major share of retailers’ revenue and profit.

But Amazon also disappointed on slower revenue growth for Amazon Web Services (AWS), the company’s traditionally lucrative cloud business.

Daniel Liu, research analyst at Canalys, said Microsoft Corp.’s Azure cloud business narrowed its gap with AWS during the third quarter. AWS accounts for nearly a third of the global cloud market.

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“There have been some creeping concerns about consumer activity … and if Amazon is tempering expectations, it says a lot about the industry,” CMC Market analyst David Madden said.

Most analysts, however, stood by Amazon’s long-term prospects.

“Whether all the extra investment will be worth it in the end is perhaps open to question, especially given the lacklustre sales guidance for next quarter. But it’s been foolish to doubt Amazon in the past,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

The S&P 500 and the Nasdaq rose on Thursday following strong quarterly reports from several technology companies, including Microsoft Corp, but dour results from 3M Co stymied the Dow Jones Industrial Average. Reuters
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