Amazon.com, Inc. (NASDAQ:AMZN) just reported a big profit miss, earning just 52 cents per share against expectations for 78 cents. This miss caused Amazon stock to fall 8% in the minutes that followed its third quarter report. AMZN stock then pared the losses and is currently trading lower by just 5%.
Furthermore, Amazon met revenue expectations with $32.7 billion on year-over-year growth of 28.9%. For the trailing 12 months, AMZN’s operating cash flow increased 49% to $14.6 billion compared to $9.8 billion in the 12 months ended Sept. 30, 2015.
Amazon Web Services (AWS) revenue, always a topic of hot debate, came in at $3.2 billion in net sales. That’s good for year-over-year growth of 53.4%. However, operating income from AWS doubled to $861 million, continuing an ongoing trend of margin improvements for AWS.
With that said, the fact that EPS was lower than expected and AWS’s margin continues to rise is a reflection that Amazon.com’s investments in content, infrastructure, and fulfillment is catching up with the company. This, coupled with net sales guidance between $42 billion and $45.5 billion that is on the low end of expectations is likely weighing on AMZN stock following the company’s third-quarter report.
UPDATE: The final piece of the equation is, in fact, price.
After a five-year 250% gain, Amazon stock was priced for perfection. Therefore, the stock losses may have more to do with valuation than actual earnings performance.
Amazon stock, while primed for a lot of growth, is not a company I would want to own right this very second. Sure, AMZN could easily reverse during the conference call, or throughout the day on Friday. In fact, it is possible that Amazon stock trades at new highs one week from now.
However, the upside at this point is very limited. Even if you assign a valuation of $150 billion for AWS, I am not sure how you value the rest of Amazon’s existing business at $220 billion. That would be more than the far larger Wal-Mart Stores, Inc. (NYSE:WMT) and near equal to an Alibaba Group Holding Ltd (NYSE:BABA) company that is not only larger, but growing faster with potentially an even more impressive investment portfolio.
In other words, don’t buy AMZN stock on the pullback. Yes, growth is hard to find right now, but you don’t have to pay through the nose to get it.
Let AMZN get cheaper.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.