Given the way Amazon.com, Inc. (NASDAQ:AMZN) is trading, you might think that CEO Jeff Bezos compromised national security, and that his executive management team committed a laundry list of securities fraud. But don’t worry — Amazon stock isn’t turning into Washington, D.C. Rather, the markets are overreacting to an earnings report taken out of context.
To kick off this week, AMZN stock started with a disappointing 3% loss. This adds on top of a near-3% loss last Friday.
The culprit was a so-called bad earnings miss for the second quarter of fiscal 2017. And yes, on paper, the financial results weren’t pretty by any stretch of the imagination. Against an earnings-per-share target of $1.42, Amazon only mustered 40 cents.
The miss translates to a near-72% negative surprise. With such dramatic margins between expectations and reality, I can understand why Amazon stock sold off. However, I can’t justify it, other than to say it was an opportunity for profit-taking. In the long run, this earnings miss is much ado about nothing.
InvestorPlace contributor Richard Saintvilus nailed it on the head when he wrote that “The drop in AMZN shares shows that Jeff Bezos doesn’t operate the way Wall Street analysts would like.” It doesn’t take a brain surgeon to see how Saintvilus came to this conclusion.
Look at the company’s quarterly history. AMZN stock has never been an “earnings queen.” Going back to at least fiscal 2014, the e-commerce giant has missed at least one EPS target annually. Inclusive of the latest report, AMZN’s misses average a negative surprise of a shocking 51%.
Except that it’s really not that shocking. Saintvilus notes that Bezos always invested in the future. That costs money, and it’s the reason why I’m not worried about Amazon stock.
Amazon Stock Marches to Its Own Beat
Those new to the AMZN game should read InvestorPlace contributor Luke Lango’s excellent write-up. In a nutshell, the online retailer and master-of-the-universe fights against increasingly aggressive competition. For instance, Wal-Mart Stores Inc (NYSE:WMT) is ramping up their e-commerce channel. Microsoft Corporation (NASDAQ:MSFT) is going toe-to-toe against Amazon in the cloud computing sphere.
Again, maintaining dominance costs money. Amplify that sentiment a hundred-fold when dealing with industry titans. But as Lango points out, “It spends big now to kill competition and take over a market. Once it takes over the market, it stops spending, and margins and earnings skyrocket.” Over-analyzing Amazon stock has yet to prove successful long-term.
Now, everybody knows that AMZN runs an incredibly intelligent operation. Sometimes, though, the result of this intelligence goes lacking in appreciation.
A prime example is the company’s home makeover reality show. According to InvestorPlace writer Karl Utermohlen, “The e-commerce retailer unveiled its latest original series, which is called Overhaul. The show is part of an initiative by the company that will help increase Amazon’s sales as some of its products will be featured on the series.”
Under any other circumstance, this news lacks consequence. But here’s the deal — the company achieved tremendous success with its Amazon Video platform. Of these customers, 31% watched original content in December 2016. This metric represents a near two-fold increase from December 2015 figures, when 16% consumed original material.
It’s not just that the online retailer dominates. They scour, they strategize and they strike with commitment and precision. They are so effective that innocuous news may lever dramatic impacts in the future. Again, I’m not worried about Amazon stock missing a forecast or five.
AMZN Stock Will Hit Expectations Again
As I previously mentioned, I think recent AMZN stock volatility is based largely on technical dynamics. Almost everyone hates buying shares at the top of the market. Plus, if you’ve already amassed superb returns, your perceived risk-reward balance may no longer be favorable.
If you’re in this position, no one can fault you. But what I would hate to see is an investor getting scared out of a position in Amazon stock based on one earnings report.
Click to Enlarge
Not only is AMZN killing it on the top line, it will do so repeatedly on the bottom line. Perhaps not on your timeline, but exceed expectations it will.
In January of last year, 46% of affluent Americans were Amazon Prime members. This statistic has been sharply moving higher since November 2011, when only 14% of wealthy Americans were members.
This is what you would call knocking it out of the park. AMZN is winning with the rich. It’s winning with the not-so-rich.
The behemoth is even winning in retail where almost no one has anything to cheer about. Yet the markets want to punish Amazon stock for investing in the machinery that allows this dominance to materialize in the first place. Does that sound right to you?
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
