Amazon (AMZN) stock is getting crushed Friday amid an already terrible year after delivering a shockingly bad quarterly earnings report and outlook — and that makes AMZN a buy.
AMZN just coughed up its deepest quarterly loss since 2003 because it’s costs are rising so much faster than sales. Even worse, AMZN current-quarter guidance and view on holiday sales came up short of Wall Street forecasts.
If the best thing a company can deliver during the reporting season is a beat-and-raise quarter, then Amazon’s news was the worst.
Shares tanked more than 10% in pre-market action, and that’s after falling more than 20% for the year-to-date. Even the troubled broader market has managed to eke out a gain of nearly 6% so far this year.
It seems almost impossible for a company with $21 billion in quarterly sales — a 20% increase over last year — to post a net loss of $437 million. More unaccountably, the year-over-year loss widened by more than 10 times from $41 million last year.
And yet AMZN only spent every penny it earned and more last quarter. But make no mistake, it did so very intentionally.
When it comes to investing in Amazon stock, you have to realize that running at a loss isn’t a bug, it’s a feature.
AMZN Stock: Prepare for a Long Wait
As with Bond villains, CEO Jeff Bezos won’t stop growing Amazon until it reaches world domination. (The company, for its part, says it simply has too many great opportunities to ignore.) One day, AMZN’s high-spending days will come to an end, and that will open a firehose of profits for shareholders and Amazon stock to enjoy.
This is what you are signing up for when you buy Amazon stock. Crying about the company being unprofitable is like the frog getting mad at the scorpion. More than most companies — especially companies with a market value of $145 billion — Amazon stock represents a claim on future profits.
That’s how Amazon — a retail company at its core — gets a forward price-to-earnings (P/E) of 150. That’s pricey even if the long-term growth forecast is more than 40% per year.
If you’re comfortable paying that kind of premium for any stock, it might as well be Amazon — as long as you’re fully aware that it’s happy to take loss after loss. Presumably, one day Bezos will pare back on the investments Amazon makes on itself and the profits will flow.
But that day will be a long time in coming. Only Bezos knows when enough is enough, and as more opportunities arise, Amazon will likely want to spend on those too. More recently it’s been things like streaming media, smartphones and big data, but there’s sure to be something else that comes along.
Furthermore, Bezos isn’t going anywhere. His stake is far too large for shareholders to enact a coup. When you buy Amazon stock, results like last quarter’s are what you are signing up for.
And yet Amazon is a buy on this dip if only because the market valued it at more than $400 before. The market has been quite comfortable paying that price for AMZN stock, and it will again once. All Amazon has to do is boost margins a bit and the market will fall back in love. The sentiment is simply too strong on this name, and its problems are completely of its own making.
It won’t be a fun ride — the market does’t much like it when a $300 stock comes with huge losses attached — but we’ve seen this before. Managing for growth has always been the M.O. at AMZN. And one day Amazon stock really will grow into its valuation.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.