- Is Amazon's price target irrelevant?
- Twitter's downgrade is not helpful.
- How helpful are the analysts' stock price targets?
Here is something I always find interesting about analyst price targets. In all honesty, they are pretty irrelevant when it comes to selecting a stock to buy. In this case, Amazon (NASDAQ:AMZN) has become the target of dartboard analysis.
Just look at the price targets.
If you read the summaries of the reasons provided, they are pretty bad reasons for the stock to magically trend to 1000. Speaking of 1000, that is supposed to be a huge psychological barrier due to the triple zeros. When I first began learning about the markets, I used to think these types of levels were important. They are not. They are just a number, but I find it interesting that the targets all seem to cluster around this region. Think about what will happen if Amazon rises to 1000. Targets have no meaning. They falsely provide certainty in an uncertain environment.
In fact, remember this individual who said Amazon was a three trillion dollar company? It is completely herd driven analysis. You cannot make such a statement. Period. These calls are more about massaging egos and reputation rather than making profits.
Instead of focusing on the current business models within Amazon and for it to continue to deliver on expectations, focus on the business model sustainability. Believe it or not, there is more to Amazon than the web services I see many drooling over. Look over shareholder letters. See if management is willing to take risks. See if they are willing to experiment. In many interviews with Bezos and even in his first letter to shareholders, he shows this vital characteristic. But, Bezos is not solely responsible for the direction of Amazon contrary to what you mostly see in the financial press.
Now let's look at the other extreme.
Twitter (NYSE:TWTR) coverage makes no sense at all. RBC came out with a downgrade this past week. There is no point in a downgrade when the stock is so close to being worthless. (This is why I stress stop losses all the time.) The downgrade does not provide any new information. Also, we do not know the response rate and if the sample is representative of those who primarily use social media for advertising. However, assuming the advertisers are representative, I can tell you without looking at the sample that as long as the sample is above 30, the results should represent a normal distribution. Thus, the shape of the distribution will give you a clue as to how advertisers really feel, rather than the individual percentages they cite. I do commend them for running the survey more than once since it gets rid of the outliers and the means of these surveys will represent a standard normal distribution, removing any asymmetry.
Again, what matters most is the business models which is such a basic concept that Wall-street does not seem to understand. If the user growth is slowing down and decreasing and active users are decreasing, then the corporate strategy for Twitter's main business model is not working. There is nothing valuable. There is no need to find reasons. The firm needs to find alternative sources of revenue. Management might be a problem. There is so much belief in the product and process that management may be failing to observe the irrelevance of the platform. Jack Dorsey, alone, is not considered management contrary to what you consistently hear. Common sense will show you after consecutive quarters of decelerating growth, there is something wrong with the revenue portion of the business model. The fact that Twitter is a technology company does not mean it is a good investment. Twitter does not know how to use its technology. I am not condemning Twitter at all. I am just stating what I believe should be common knowledge for well over 1.5 years. There was nothing new in the downgrade.
So, what does this mean for you? Look at both companies and don't get swayed by the external analysis. The financial numbers are a result of managerial actions. You need to look at a trend in the numbers, not just quarterly analysis. Don't focus on increasing revenues, they only tell part of the story. You want to look at how the business models of the companies will sustain competitive advantages. You do not want to focus on incremental product innovation, such as Apple with its iPhones.
Most analysts will never tell you to stay out of a stock. You are always recommended to be in the market in some shape or form.