Amazon.com, Inc. (NASDAQ:AMZN) blew away estimates in its latest quarterly earnings report. With net income more than doubling last year’s levels, it beat analyst estimates by a wide margin. Also, with a price increase coming for its popular Amazon Prime service, investors took the Amazon stock price higher.
However, with the stock’s high multiple, Amazon stock still behaves as a proxy on the powerful psychology that drives the equity.
AMZN Beat Estimates Big
AMZN exceeded Q1 estimates by a wide margin, reporting a net income of $3.27 per share, $2.02 higher than expected. The company earned $1.48 per share in the same quarter last year. Revenues came in at $51.04 billion, a 42.9% increase from year-ago revenue levels. The e-commerce king also beat analyst estimates by $1.1 billion.
Amazon also updated Q2 guidance. The company now expects to earn between $1.1 and $1.9 billion in operating income. This would mean huge growth from Q2 2017 when operating income came in at $628 million.
The company also expects revenue levels between $51 billion and $54 billion. It brought in $37.96 billion in the second quarter of last year.
Still, the news item that gained the most attention was the prospect of higher income from Amazon Prime. AMZN revealed that many of its 100 million Prime members will see the annual fee rise to $119.
Those who subscribe monthly recently saw a price increase. Now, profits should rise further as yearly members will also pay more.
Amazon’s Income Is in the Cloud
Although the news tends to focus on the consumer side, no profit driver is larger for Amazon stock than Amazon Web Services (AWS), its cloud services platform.
Even though it functions outside of its core retailing business, this unit drives 72% of the company’s consolidated net income. As InvestorPlace reported earlier, AWS sales rose 49%, while net income saw a 57% increase.
Companies such as Microsoft Corporation (NASDAQ:MSFT), IBM Common Stock (NYSE:IBM), and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have posed a tougher competitive challenge in cloud services. However, AWS continues to enjoy the largest market share in this business.
Psychology Is the Main Driver for Amazon Stock
All of these factors have and continue to drive the value of Amazon stock. However, the equity’s strongest asset and most significant danger comes from the market psychology associated with AMZN. With quarterly net income more than doubling from last year’s levels, the euphoria continues to work in favor of the equity.
Still, all of these benefits have been priced into the stock many times over. Amazon stock continues to support a price-to-earnings (PE) ratio that prices the stock for perfection. The equity trades at over 270 times current earnings and supports a forward PE of 150.
Although valuation is not everything, none of its large peers in either technology or retail maintain a PE at these levels.
Unfortunately for owners of AMZN stock, perfection has not become a hallmark of the company. In previous articles, I have been critical of Amazon, even at one point comparing them to Sears Holdings Corp (NASDAQ:SHLD). Admittedly, the Sears comparison is more of a 100-year view, when most investors think in shorter terms.
Still, AMZN continues to repeat the mistakes of Sears and Walmart Inc (NYSE:WMT). It took decades of customer service and worker complaints to affect the bottom line, but the decline eventually occurred.
AMZN now deals with the same type of complaints on a regular basis, most recently with a protest this week when CEO Jeff Bezos visited Germany. As more of the general public takes note of this phenomenon, the high PE will likely become more difficult to justify.
The Bottom Line on Amazon Stock
With better than expected Q1 numbers and a high valuation, AMZN stock continues to serve as a proxy for the psychology driving the stock. Amazon’s revenue and income greatly exceeded analyst expectations. With e-commerce and AWS continuing its growth, the company appears unstoppable to many investors.
An increase in the price of annual Amazon Prime subscriptions promises to bolster this growth further.
However, the price of AMZN reflects all of these benefits several times over. Given the growth, most every serious investor continues to ask themselves, “should I buy Amazon stock?” Assuming the psychology with AMZN holds up, it will likely continue rising.
However, both the valuation and the negative news indicate the stock will face a brutal reversal if that psychology changes. Unless you are comfortable with betting on this kind of psychology, I recommend avoiding AMZN stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
