I recently wrote about the disappointment in Amazon.com, Inc. profits (AMZN). The company missed sales estimates, dropping its stock 7.6% on earnings day.
Management, citing slower revenue growth in the third quarter, was the main catalyst: a decline from over 20% to an expected 10-16% for the next quarter. Comps will be hard to beat, which worries some investors.
The central theses
- Amazon recently missed out on revenue.
- Keep in mind that as your profits increase, Amazon’s stocks get cheaper.
- Big wins attract big money buyers.
Again, that “return to earth” was expected, but this company’s outlier growth story may have made investor expectations difficult to meet. However, it’s important to know that Amazon’s long-term plan is bearing fruit. I think it’s just the beginning.
Management focuses on long-term Free cash flow. What started out as a profitable business and has remained for years continues to grow into a large profitable business. Amazon’s most important retail business is low-margin and high-volume. Once the corner was turned and widespread trust was built, it practically ensured that it would be tough to compete and even more difficult to compromise Amazon’s successful foundation.
The words Investors and Dealers are often interchangeable these days, but there is one crucial difference. Those who bought their way into Amazon’s vision early and held it through the lean years are the investors. And the ones looking for quick wins are the dealers.
When stocks react to negative earnings surprises, make no mistake – it’s the hallmark of traders. Traders are by nature speculators who bet on the short-term future value of something. They tend to fixate on very short-term events – like slowing sales growth or a diluting purchase.
But an investor would do well to look long-term. As for Amazon, the retail business, while low-margin, is gigantic and the be-all and end-all while other seemingly independent businesses are incubating.
Cloud computing Amazon Web Services Division (AWS) is a formidable, high-growth enterprise software company. Early investors who thought online bookselling was a smart idea probably never foresaw this growth engine. Also interesting for the future is that Amazon’s new CEO Andy Jassy basically built AWS. So his vision for the future of this growth unit has clear long-term positive effects.
In addition to online commerce and the cloud, Amazon has some of its tentacles in the media, advertising, software, hardware and logistics that we know. Oh – let’s not forget Prime, which also grows like a weed. Eventually, Amazon is buying MGM for $ 8.45 billion (subject to FTC approval). This is believed to be an Amazon Prime Video game in order to add content and popularity to rival Netflix, Inc. (NFLX) more serious.
So, in looking at an investor’s perspective on this growing conglomerate, let’s look back on a few important things that are missed in focusing on this current earnings disruption.
This is a big topic: Amazon has been trading at cheapest value for at least five years (maybe more based on certain metrics). Here we consider a Price / earnings ratio (P / E) chart over time from 2016 We can see that it is gradually falling.