Amazon.com, Inc. (AMZN) reported gains last week and surprised investors. In a seemingly rare move, the company missed sales estimates and dropped the stock on Friday. Amazon shares closed 7.6%, shedding nearly $ 120 billion in market value.
The real shock, however, came when Amazon expressed its expectations of significantly slower revenue growth in the third quarter of 2021. Gross sales are expected to increase by 10 to 16% in the next quarter. That sounds great on the surface, but it’s a clear slowdown suggesting that the pandemic tailwind may be over. Quarter-over-quarter and year-over-year comps are going to be hard to beat now that people are trying to get back to normal.
The central theses
- Amazon surprised investors when it missed sales estimates in its latest earnings report, pointing to slower sales growth in the next quarter.
- The e-commerce giant is struggling to meet demand and labor shortages are hitting the company hard.
- The company is still seeing phenomenal growth, and Big Money has loved the stock for years, suggesting Amazon could get back on track quickly.
This “return to earth” was expected, but perhaps not to the extent that management was discussed in the call for results. This could lead you to wonder if Amazon is no longer a great investment. Is the billing in sight?
Quick response: No. Wait a minute … Sorry – I had to interrupt this letter because I had to buy something from Amazon. I’m back now …
Let’s take a quick look at the horizon of Amazon’s business environment, the company’s strength Basics, and whether or not there is a great demand for stocks.
Amazon’s Environment Horizon
Amazon spent a lot of money last year increasing its ability to meet demand and cut just $ 52 billion to bolster capacity. If that’s not surprising, the company has also hired nearly half a million employees and added 460,000 new employees.
Even so, the company is struggling (in Amazon terms) to meet demand. Management said the number of one-day deliveries has decreased and has not yet recovered to pre-COVID-19 levels. And the demand will continue to grow: the pandemic has brought many new Amazon Prime members, which means further demand.
The whole country is concerned with labor shortages. But with the size of Amazon, it hits hard. The company needs to spend more on signups and raise wages to attract new employees. And when you add the current negative press about working conditions, it’s easy to see that money has to be spent on hiring people. Be clear: These are growing pains, not problems with the underlying business.
Another good news is that Amazon’s international business turned profitable five quarters ago and is moving forward with more than $ 1.6 billion in profit.
Despite a disappointing earnings report, Amazon still has some phenomenal numbers. The one- and three-year sales and earnings growth is double-digit, with three-year profit growth of over + 108%. Amazon also enjoys a 40% Gross profit margin.
Yes, the company is firing from all cylinders. Now let’s move on to the share.
Amazon has been a big money darling for years
When evaluating a stock investment, it is important to consider institutional Requirement. When big money loads up with fundamentally superior stocks, it increases the likelihood of winning over time. One way to find out if this is happening is to look at the price action in conjunction with volume. If stocks rise higher as volume increases, this is a good indication of institutional buying.
Amazon is a real runaway stock. That means it’s one of the best-performing stocks of all time. These are the types of companies that I am looking for. Here is a snapshot of the basics as well technology I take care of valuing a stock. Only for a funny scorecard is juice for good, so-so for okay, and a bad score is not ideal:
On the left we clearly see a company with enormous fundamental strength. On the right we see a company with recent technical weakness due to disappointing earnings. Down 5% last month, Amazon stock is 14% below the S&P 500 for the year to date.
At the bottom right of the table above, we can see Amazon’s outlier status. That means the price has risen on large volumes, while it has done well 32 times since the summer of 2014. That is very strong in the long run.
To give you an idea of what big money purchases look like, below is a graph from 2019. I arrows a few points in 2019 and 2020 when unusual purchases occurred: