If we were talking about any other company, a robust double-digit earnings beat would generate decisively positive headlines. But since we’re talking about Amazon (NASDAQ:AMZN), we can’t assume anything. So far, Amazon stock has responded well, ticking up slightly in after-hours trading following its first quarter of 2019 results. However, a debate rages.
On one end of the spectrum, bullish analysts felt more than vindicated in their optimism. Prior to the Q1 report, consensus estimates pegged earnings-per-share at $4.72. AMZN veritably smashed that figure, posting EPS of $7.09, or a 50% positive surprise. Better yet, the e-commerce giant obliterated the year-ago quarter’s EPS of $3.27.
It’s also worth noting that AMZN stock continues its streak of outstanding EPS beats in Q1. For instance, the earnings surprise for Q1 2018 measured 160%. In Q1 2017, it was 36%, and the year prior, 84%.
Furthermore, Amazon stock has transitioned from being a growth-centric name into a profitable one. We’re no longer talking about the company running negative earnings. Instead, it’s finally driving consistent, quantifiable value for shareholders.
But on the other end, bearish traders also had some meat of their own. Specifically, AMZN stock is no longer a monster growth name. In Q1 2019, the e-commerce giant delivered $59.7 billion in revenue, right in line with expectations. Also, its critical AWS segment rang up $7.7 billion, again, perfectly matching expectations.
But one of the biggest concerns was Amazon’s slowing advertising sales growth, which was “only” 36% year-over-year. Over the last few quarters, stakeholders of Amazon stock grew accustomed to triple-digit growth in this segment.
Like I said earlier, if we were talking about a different company, this wouldn’t generate such heated debate. How then should investors approach AMZN stock?
Amazon Stock Can’t Shift Gears It Doesn’t Have
On my daily drive to meet clients, I always find myself merging onto the freeway under tight conditions. Now, I drive a stick-shift BMW armed with six gears. It should be enough but sometimes, I find myself wishing for another, “aggressive” gear to wring out more power from my rather small inline-six engine.
I’m going to solve this problem because I’ll soon be the driver of a Mercedes-Benz armed with nine gears. I shouldn’t ever find myself in a situation where I can’t find the perfect gear for any situation. But why mention this anecdote in an article featuring Amazon stock? Because I think some analysts expect the impossible out of the organization.
Sure, it’s a proven powerhouse, but AMZN stock can’t shift gears it doesn’t have. For instance, advertising growth was sure to come down. You might call it the impact of the law of large numbers. In this case, though, I call it Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
Currently, these two technology behemoths hold the top-two slots in the digital advertising space. Recently, Amazon climbed to the No. 3 ranking. So, what’s the problem?
Apparently, it’s not enough. Many analysts and investors want to see sustained triple-digit growth in ads because it ties into AMZN’s future strategies. But I think that this is an unrealistic expectation. Amazon got to third place because it aggressively picked off lesser-resourced competition.
But Google and Facebook? The former owns the internet, and the latter owns social media. Let’s not forget that Amazon stock is specifically geared first and foremost for e-commerce. It has done a remarkable job getting this far, disrupting so many organizations and industries.
That said, going after Google and Facebook is an entirely different ballgame.
AMZN Operating at Full Capacity
Going back to my car analogy, I wasn’t entirely accurate about my new ride meeting all situational needs. While my current vehicle lacks in power, it has a very light curb weight. From a standstill to 20 miles per hour, few cars can beat it.
On the other hand, the Mercedes I’m getting is extremely heavy, tipping the scale at over two tons. It has gobs of power, but it comes at quite the cost of portliness (and I’m assuming gas mileage).
In other words, everything in life is a trade-off. The same can be said about AMZN stock. After dominating e-commerce and disrupting multiple industries, Amazon simply can’t sustain its prior, almost-bonkers growth rate. What it can do, however, is make its various businesses profitable, which it did convincingly.
But I guess the markets want high growth and rich profitability. Unfortunately, the math doesn’t work. Amazon is in the same league as Apple (NASDAQ:AAPL) and other giants with a legitimate shot at cracking a trillion-dollar market capitalization. It can’t grow because at some point, there’s no place to grow to!
Look, I wish I could find a car that’s high on power, low on weight and easy on the wallet. But that’s not how economics work. Similarly, don’t punish Amazon stock because it didn’t hit certain crazy metrics. AMZN is already flying in top gear. If you want to shift higher, find another company.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
