Last week wasn’t the finest hour for Amazon.com, Inc. (NASDAQ:AMZN), that much anyone can concede. Following a pair of robust earnings beats averaging a positive surprise of 72%, AMZN stock fell well short for the third quarter of fiscal year 2016.
Against a consensus earnings per share target of 78 cents, AMZN stock only managed 52 cents, a downfall of 33%.
For many investors, Amazon is starting a worrying lack of profitability in the second half of the year. Closer examination of the numbers, however, reveals a company that is not in flux, but is quite a bargain after the selloff.
Why People Ran From AMZN Stock
As a result of the disappointing miss, the markets punished Amazon stock, perhaps a little too eagerly. Shares dropped 5% for the Friday close, and a few cents more during afterhours trading. In fact, this was the worst single-day loss for Amazon stock since Feb. 5 of this year.
For those that need a quick reminder, benchmark exchange-traded funds like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) were down 8% against their January opener at that time. In other words, this was a noteworthy loss for AMZN stock.
Those that are bearish on Amazon stock might not have a problem with the company per say. But because the e-commerce giant is very much in the retail business, its ability to do well largely depends on the health of the consumer. That metric took a bit of a hit in October, according to the University of Michigan’s Index of Consumer Sentiment. The oft-cited index slipped 4% month-over-month, and is down 3% from the year-ago level.
In this particular case, the sentiment index isn’t some mishmash of charts and figures that only econ nerds and Ross Perot would enjoy. On the contrary, there is a brooding confirmation between downtrending statistics and tangible losses.
When earnings for Amazon stock were released, the company also reduced its guidance for the critical holiday quarter. That spells big trouble for the retail sector, especially the brick-and-mortars. Adding salt to the wound, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) is down nearly 3% year-to-date.
Don’t Give up on Amazon Stock
These are all valid reasons to keep a close eye on AMZN stock, perhaps trimming some of the profitable holdings as a hedge. But giving up on the company altogether — or going to the other extreme of shorting it — is silly. Amazon stock had an earnings miss, not a financial fraud that will impugn the integrity of an entire industry. This give-and-take is a normal part of the business cycle.
To be frank, the one-day collapse of Amazon stock is much ado about nothing. The headlines may be screaming hellfire and brimstone, but the non-zealots will just as easily counter with Amazon’s sales figures. At $32.7 billion, revenue slightly beat out consensus estimates, and is a whopping 29% higher than the year-ago quarter’s haul. That’s the kind of performance that you’re simply not going to get among traditional retail outlets.
As many Wall Street analysts have pointed out, Amazon.com didn’t miss profitability targets due to a deleterious pressure point. Rather, the Seattle-based company is preoccupied with investing and building for the future.
Whether it’s building in-house media content or expanding into uncharted territory for e-commerce retailers, Amazon is about the future. Such a forward-thinking strategy does come with an opportunity cost in what it can do today. This is no different for a company than it is for an individual. Yet, we apparently praise individual sacrifice while punishing corporate ones.
The Closer for Amazon.com, Inc. (AMZN)
I’m not terribly worried about the prospects for AMZN stock. This has nothing to do with the safety in numbers aspect, although it is a comfort. For me, the bottom line comes down to the technical performance.
People have a strange tendency of voting with their wallets irrespective of what their mouths may state. Time and time again, the smart money has stuck with Amazon stock through thick and thin. I doubt that a 5% loss in market value will shift that sentiment any time soon.
I also don’t buy into the argument that AMZN has peaked, and is therefore no longer a growth prospect.
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For the record, the last time AAPL hit triple-digits was in 2009, when every company was recovering from the global financial crisis. GOOGL actually was a few percentage points short of the century mark.
Since its initial public offering, annual returns for AMZN stock average 88%. In the current decade, investors have gained over 34%. For AAPL, lifetime returns average 30%, and this decade averages 23%. Aside from the superior performance, what makes AMZN so remarkable is that it’s willing to take risks. For example, 2011 and 2014 saw Amazon stock absorb sharp losses, yet its returns for the decade beat out Apple’s, which only saw a 2% loss last year.
Everybody’s Still Chasing Amazon
This type of consistent growth doesn’t just sprout from self-serving corporate pep rallies. AMZN stock is beating out the rest because of its “futurist” mindset. Traditional retailers, meanwhile, are in trouble in part to their antiquated business models.
That shouldn’t impugn Amazon, which is a constantly evolving machine. That evolution necessarily involves risks such as an earnings shortfall. But don’t confuse nearer-term disappointments with longer-term incompetence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
