On paper, it was another day and another strong earnings beat for Amazon (NASDAQ:AMZN). Indeed, Wall Street anticipated outperformance, with Amazon stock closing up 7% prior to the third-quarter 2018 earnings report. Unfortunately, the details left an extremely sour taste in people’s mouth, eventually tanking shares during extended trading.
Just how bad was the impact? Amazon stock flirted with double-digit losses after the e-commerce giant disclosed its latest financials, currently sitting at around an 8.2% loss. Needless to say, the volatility in AMZN is a huge distraction given that the markets put in another unconvincing performance.
At a time when interest rates are soaring and where the country is completely divided, the Street needed AMZN to deliver all the goods. Unfortunately, the giant profitability leap was the only real source of positive news. The company fell short on revenues and the holiday quarter guidance. This is extremely worrying for not only Amazon stock, but the entire consumer economy.
On a practical level, AMZN stock is the real economic benchmark. E-commerce sales represent close to 10% of all retail-related revenues in the U.S. Amazon takes a big chunk of that, and not just through their online marketplace. The company is a hub for exciting ventures such as online streaming and cloud computing.
In the modern world, if you’re doing anything at all, you’re probably doing it through Amazon. Obviously, I’m disappointed in the fallout, but I can’t say that I’m completely surprised.
Just a few days ago, I warned about growth stocks that could be derailed soon. I put Amazon stock at the top of my list. While I’ve loved the fundamentals, I did not like the technicals. The markets didn’t show confidence heading into Q3, and the markets are usually right.
Amazon Stock Drops on Deceptively Poor Earnings
If you didn’t consider any context, you’d expect AMZN stock to flourish on its beat for the bottom line. Against a consensus earnings per share target of $3.14, actual EPS came in at $5.75, or an 83% surprise.
The latest haul easily beat out the year-ago quarter’s results, which was 52 cents of EPS. Moreover, Amazon has a history of ridiculously outsized beats. In Q2 of this year, the company doubled its profitability expectations, and in Q1, it produced a 160% positive surprise.
The wheels started to fall off, however, on the revenue front. Covering analysts expected $57.1 billion, while the e-commerce firm only generated $56.6 billion, meaning a 0.9% miss. Although this figure represents roughly a 30% lift over Q3 2017 results, it’s not that impressive for Amazon standards.
In Q2, the company saw revenues increase over 39% year-over-year. Going into the holiday season, you obviously want sales momentum to rise, not deflate.
More significantly, Amazon’s AWS platform missed its $6.71 billion consensus target, mustering instead $6.68 billion. Again, percentage-wise, it’s not a “bad” miss. But AWS is another growth opportunity outside of the online behemoth’s e-commerce marketplace.
As if these factors didn’t give investors enough to fret about, management also delivered poor Q4 revenue guidance. Prior to the earnings conference call, analysts expected sales of $73.8 billion. What they got, however, was a range between $66.5 billion and $72.5 billion.
The optics really hurt Amazon stock. At the lowest end, revenue would fall nearly double digits against consensus. AMZN’s most optimistic forecast would still miss consensus by almost 2%.
Adding insult to injury, Q4 operating income guidance also disappointed. Wall Street anticipated $3.9 billion, but the company’s range is between $2.1 billion to $3.6 billion.
How Do You Approach AMZN stock Now?
Before we become permanently bearish on Amazon stock, it’s worth reminding everyone that the profitability figures were impressive. In Q3, net income skyrocketed to a record-high $2.8 billion. That is more than a ten-fold increase from the year-ago level. Furthermore, operating income of $3.7 billion was up over 76% against consensus.
Management emphasized its money makers, which are the company’s ventures in the cloud, advertising and the core e-commerce marketplace. Plus, CEO Jeff Bezos drew attention towards the successful Amazon Business, which caters towards business customers.
These are all strong points. Still, AMZN stock has benefited from an ever-rising growth story. For the first time in recent memory, we’re seeing a chink in the once-unassailable armor.
Of course, I still believe in the longer-term fundamentals, so I view the volatility in Amazon stock as an opportunity. However, I’d also respect the markets. Competitors like Walmart (NYSE:WMT) and Target (NYSE:TGT) are doing well in the second half of this year. Plus, they pay dividends, while Amazon does not.
For contrarians, I’d wait out for at least a few more sessions. Inarguably, AMZN stock is correcting its earlier euphoria. Once the dust settles, I’m confident that we’ll be back to the rallying phase.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.