Shares of Amazon (AMZN) gained 9% yesterday in the lead-up to the company’s fourth-quarter and full-year earnings report — a pop that left shares worth nearly twice as much as they were a year prior, despite that market’s mostly down roller coaster time period.
But, AMZN stock suffered a roller-coaster style drop of its own once the earnings numbers were actually released after the bell on Thursday. Shares lost those one-day gains, and then some, with investors fleeing to the tune of a 13% after-hours sell-off.
The reason for the panic? The e-commerce giant posted a wide earnings miss, with EPS tallying $1 in the last quarter of the year. That represented the company’s most profitable quarter ever, and more than twice the EPS posted a year earlier, but didn’t live up to the $1.56 Wall Street consensus.
Sales suffered from a case of high expectations, too. A 22% improvement might sound nice in isolation, but the $35.75 billion wasn’t as impressive as the $35.93 billion analysts expected.
AMZN Key Drivers Remain Solid
Remember, though — not too long ago, investors didn’t give a hoot about profits from Amazon. They were confident in its investments, growing footprint, and long-term vision. What’s changed? Well, earnings — even if they’re actually losses — are always more of an expectations game than anything else and always add volatility to an investment. But right now, investors are especially skittish and trigger-happy, considering the broader market environment.
That’s why, despite the quick negative reaction, I remain confident in Amazon stock for the long haul, as I have been for some time. Despite the earnings miss, the key drivers for the company’s continued growth are still intact.
Zooming in on the sales and earnings miss, it is worth noting that Amazon took a brutal $1.2 billion foreign currency exchange rate — something that represents external macro factors (as opposed to a weakening of the core business) and which management said had an unexpectedly large impact.
But beyond that, the parts of the company’s business that caused investors to so consistently bid AMZN stock higher over the last year or so remain intact. The company’s profitability, for example, is largely thanks to Amazon Web Services, and that segment offered a silver lining in the report. Web Services sales rose to $2.41 billion, representing a nearly 70% year-over-year gain and topping analyst expectations. Meanwhile, operating income for AWS rang in at $687 million — a 187% improvement — on the back of a nearly 29% operating margin.
Put another way, that important segment remains rock solid and is actually outperforming.
Amazon Prime is another key aspect of the AMZN stock bull case, as Prime members significantly outspend other shoppers and are a symbol of Amazon’s transition from e-commerce site to ecosystem. And, here we have another highlight of the poorly-received earnings announcement.
In 2015, the Prime program grew by 51%, including higher-than-expected overseas expansion that nearly doubled international streaming customers, compared with the fourth quarter of 2014. Amazon’s Prime Now has expanded to more than 25 metro areas, while Prime Same Day is available in some European markets.
Bottom Line on Amazon Stock
Clearly, Amazon hasn’t remained idle and still has room to continue expanding these popular services.
Besides, all those numbers are for a quarter that’s already in the books. Looking forward, sales estimates for the first quarter were in line with the consensus, which was for nearly 22% year-over-year growth. Meanwhile, estimates are for earnings to grow by 60% per year over the next five decades, including an EPS that should triple from 2016 to 2017.
The bottom line is that any company that’s been bid up as much as Amazon stock is going to take an outsized tumble when headline numbers fall short of expectations. But, this is a blip for a still-strong tech giant, not the beginning of the end. So, if you’re sitting on the sidelines of Amazon stock, it could be worth jumping in.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
