Amazon.com, Inc. (AMZN) reported gains last week and surprised investors. In a seemingly rare move, the company missed revenue estimates, causing its stock to fall on Friday. Amazon shares closed 7.6%, erasing nearly $120 billion in market value.
The real shock, however, came when Amazon expressed its expectation of much slower revenue growth in the third quarter of 2021. Gross revenue is expected to grow 10% to 16% next quarter. At first glance, that sounds great, but it’s a definite slowdown that signals that the pandemic tailwind may be over. Quarter-on-quarter and year-on-year compositions will be hard to beat as people try to get back to normal.
Key learning points
- Amazon caught investors off guard when it missed revenue estimates in its latest earnings report and led to slower revenue growth next quarter.
- The e-commerce giant is struggling to meet demand, and the labor shortage is hitting the company hard.
- The company continues to post phenomenal growth and Big Money has been fond of the stock for years, suggesting Amazon could be back on track soon.
This “return to Earth” was expected, but perhaps not to the extent that management was discussed during the earnings call. This might make you wonder if Amazon is no longer a great investment. Is the reckoning imminent?
Fast answer: New. Hold on… Sorry, I had to interrupt this writing because I had to buy something on Amazon. i’m back now…
Let’s take a quick look at Amazon’s business environment horizon, the company’s strong fundamentals, and whether or not there is high demand for stocks.
Amazon’s Environmental Horizon
Amazon spent gobs of money last year to increase its ability to meet demand, with just $52 billion to bolster capacity. If that doesn’t confuse you, the company has also hired nearly half a million people, adding 460,000 new employees.
Even with that, the company is struggling (in Amazon terms) to meet demand. Management said the number of one-day deliveries has fallen and has not yet recovered to pre-COVID-19 levels. And demand will continue to grow: The pandemic brought with it many new Amazon Prime members, meaning more demand in the long run.
Labor shortages are faced across the country. But with Amazon’s size, it hits hard. The company needs to spend more on signups and raise wages to attract new employees. And when you add in the recent negative press about working conditions, it’s easy to see the need to spend money to hire. To be clear: these are growing pains, not problems with the underlying business.
In other good news, Amazon’s international business turned profitable five quarters ago and is making headway with profits of more than $1.6 billion.
Despite a disappointing earnings report, Amazon still has some phenomenal numbers. The one and three year revenue and earnings growth is amazing in double digits, with three year earnings growth of over +108%. Amazon also has a 40% gross profit margin.
Yes, the company is firing on all cylinders. Now let’s talk about the stocks.
Amazon has been a big money favorite for years
When determining the size of an equity investment, it is important to consider institutional demand. If Big Money is loaded with fundamentally superior stocks, it increases its chances of winning over time. One way to find out if that is happening is to look at price action combined with volume. When stocks rise higher due to volume spikes, it is a good indication of institutional purchases.
Amazon is a bona fide outlier. That means it’s one of the best performing stocks ever. These are the kind of companies I’m looking for. Here’s a snapshot of the basics and technicalities I care about growing a stock. Just for a nice scorecard, juice stands for good, so-so stands for okay, and not ideal is a bad score:
On the left, we clearly see a company with monstrous fundamental strength. On the right, we see a company with recent technical weakness due to disappointing earnings. Down 5% in the past month, Amazon stocks have so far underperformed the S&P 500 by 14%.
At the bottom right of the table above, we see Amazon’s outlier status. That means it increased in price for high volumes, while it has fundamentally scored well 32 times since the summer of 2014. That is very strong if you look at the long term.
To give you an idea of what Big Money purchases look like, below is a chart from 2019. I’ve been pointing arrows at a few points in 2019 and 2020 when unusual purchases appeared:
Also see at the bottom of the chart the increase in accumulation in 2019 and 2020. That is an indicator that you can do at home.
It comes down to
Amazon’s disappointing earnings terrified investors. The nature of the reporting miss is associated with growing pains, difficulty keeping up with demand, and difficulty hiring staff. For me, these are good issues to have.
Sales and profits are growing, even though growth is expected to slow down slightly. The company is profitable. Most importantly, Big Money has loved the stock for years. Since 2015, the shares are up over 900%!
Now I can’t give personal advice. But to me Amazon is a great company. My guess is that the stock will be back on track in no time.
Disclosure: The author has no position in AMZN at the time of publication.