Amazon Breaks Earnings Records, Stock Gets Punished

Amazon

The numbers for the last quarter for online retail giant Amazon is in, and the numbers are very impressive indeed. In spite of the company breaking all-time earnings records, the stock has dropped almost 5% in after-market trading since this seemingly very good news was released.

Some may pass this off to the sheer fickleness of stock markets, and while markets can be pretty fickle at times, we really need to look into why this is happening to see if this is a sensible and appropriate reaction to these results or not.

It’s actually not as unusual as we may think for markets to sell off after earnings announcements when the earnings results have been positive, although in Amazon’s case, it might be more of an anomaly given the impressiveness of the quarterly results that were shared with us.

The reason behind this is that investors aren’t so concerned with what has happened as they are with what will happen, and whenever we decide to put money in or take money out of a stock, we base this more upon the expectation on not just what the results have been but also where future results are headed.

If a company tells us, for instance, that last quarter was their best ever, but things could get tougher going forward, the tougher going forward information is going to be paid attention to more, and in fact, it’s the only thing that really matters between the two.

The reason why we generally look favorably upon positive quarterly earnings reports is to the extent that we may infer that if last quarter was good, this quarter will probably be good as well, and past results does speak to the likelihood of future ones in many cases, although not always.

Deciding whether to hold or move a stock will always depend on the outlook, whether that be based upon the outlook of the underlying business if we are using fundamental analysis or the outlook based upon price trends if we are a technical analyst. A company’s profits last quarter may factor into this considerably on the fundamental side, or it may not, which comes down to how things may have changed since these numbers were released.

Perhaps during last quarter, things started off very strong and then backed off as the quarter progressed, indicating declining revenues even though the quarterly numbers may be up. Things may also have changed quite a bit since the last quarter ended and its results are made known, a month later in this case with Amazon.

Earnings Numbers Don’t Always Tell the Story

This is why we should never just look at the earnings numbers to see how markets will react to them. We need to compare the actual results with the projected ones, and even then, beating expectations last quarter does not always mean that the market will see it as a positive, if the current view from the company is not as bright.

Analysts were expecting earnings for Amazon in Q4 to come in at $5.65 a share, and the company easily beat this expectation by posting $6.04 per share earnings. That’s a significant increase and one that we would expect would be cheered by the market, all other things being equal. They aren’t always equal though.

Revenue for Q4 also beat expectations, with Amazon taking in $72.4 billion, with analysts predicting quarterly revenues of $71.88 billion. That’s not such a big difference, but this does tell us that Amazon has exceeded the profitability expectations for them that were forecast, which is a good thing as well.

There’s more to these announcements than just this though, and what is concerning investors is Amazon’s predicting a slowdown with their business in the current quarter.

The retail business is cyclical, and this is especially evident when you move from the quarter that contains the holiday season, the busiest one, to the slowest one as we are in now.

The Current Quarter Forecasts Can Really Matter

This does get accounted for of course, as analysts adjust their predictions accordingly, and had predicted revenues of $60.83 billion for Q1. Amazon’s announcement that they expect these revenues to range from $56 billion to $60 billion did manage to disappoint to a degree that this news negated any positive effects of their Q4 results and painted a dimmer picture overall of the company’s near-term prospects than we had thought.

On top of this, the company announced that it will increase spending at a faster rate in 2019, and declining revenues together with increased spending equals less profit and less earnings per share. A company increasing spending is not a bad thing in itself, if it expands revenues, but when you hear that spending will be going up and revenues will be going down, this isn’t the kind of news investors want to hear.

Amazon’s stock has been on a nice little run over the last 5 weeks, adding 27% over this period at the close of trading on Thursday. The market was therefore pretty hopeful that things will continue to do well, and this news may end up taking us off this ride up and casting more doubt into where the stock may be headed in the current quarter.

Longer-term investors are probably not going to care that much about any of this, and while a stock losing 5% isn’t anything to sneeze about, it’s hardly a blip on long-term charts. Our giving back the full 27% of our gains in Amazon since Christmas Eve may not even worry some people, although this does not necessarily mean that we should just ignore our investments completely even if we are long-term focused.

Amazon did have a good day on Thursday, leading up to these announcements, and it’s a stock that a lot of people and institutions tend to favor. Even after the correction we saw late last year, it is still up over 100% over the last 15 months. A move this large also increases the risk of pullbacks, and we likely will see some sort of correction from this news, but this is still a very profitable company at the worst of times and it’s not likely that we will see this stock seriously tank anytime soon.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.