Amazon is bullish about the holiday quarter following strong Q3 results

The news: Amazon beat expectations in Q3, helped by record Prime Day sales and its fast-growing advertising business.

• Net sales rose 11% year over year (YoY) to $158.9 billion, outpacing LSEG’s estimate for $157.2 billion.
• Online store sales increased 7% YoY to $61.41 billion, beating the consensus estimate for $59.64 billion.
• Advertising revenues grew 19% YoY to $14.33 billion, roughly in line with expectations.

How we got here: Amazon has been honing its appeal to value-conscious shoppers to encourage them to spend more on its marketplace and sign up for Prime memberships.

• So far this year, the company has held at least 10 separate sales events—some exclusive to Prime members, others open to all shoppers.
• That approach worked particularly well during July’s Prime Day event, which the retailer said was a record in terms of both sales and the number of items sold, and drove “a record-breaking number of consumers” to sign up for Prime memberships.
• Amazon’s October Prime Big Deal Days were a success for similar reasons, as shoppers took advantage of the sale to stock up on household essentials and, in some cases, get an early start on holiday purchases.
• And the company continues to add Prime perks, including fuel benefits and early access to Wicked (movie) tickets, to encourage consumers to hold onto their memberships and make Amazon their default shopping destination.

Staying ahead of the competition: While Amazon is by far the dominant US ecommerce player, accounting for 40.9% of online sales, it is acutely conscious of the threat posed by Temu and other Chinese ecommerce platforms, which are making inroads not only with consumers but also with the marketplace’s large—and highly lucrative—seller base. That pushed the company to make plans for its own Low Cost Store.

Moreover, even more problematic for Amazon is the fact that many of its popular merchants are also beginning to sell on Temu, as they’re lured by the prospect of lower fees and the ability to use their own fulfillment services.

• More than 60% of Amazon’s major China-based sellers now have a presence on Temu, per The Information; the latter is also making a concerted effort to win over US merchants in order to sidestep stricter rules around de minimis and compete more effectively with Amazon on delivery speeds.
• Part of Temu’s pitch includes the ability for merchants with monthly sales of at least $300,000 on Amazon to avoid paying fees and commissions, so long as they price items 15% lower on Temu. That’s a particularly compelling proposition given that seller fees can account for as much as half of Amazon merchants’ revenues—but it complicates matters for Amazon, given that it usually penalizes sellers for offering products at lower prices on other marketplaces.
• The competition for sellers could throw a wrench into Amazon’s ability to extract more revenues from merchants—a crucial profit engine for the company that grew 10% YoY in Q3.

Our take: Despite some initial concerns that the presidential election and other world events could derail consumer spending, Amazon now expects holiday sales to be robust this year—an attitude which corresponds with our own holiday forecast.

• The company projects Q4 sales growth of between 7% and 11% YoY to between $181.5 billion and $188.5 billion—the high point of which is ahead of the average analyst estimate for $186.4 billion.

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