Expect Amazon Stock To Rebound Soon From Post Earnings Hammering

  •  Amazon stock has posted double-digit declines after its Q4 2015 results failed to meet heightened expectations.
  • Amazon's profitability showed a marked improvement.
  • Amazon also provided healthy Q1 2016 guidance.
  • Amazon shares are bound to bounce back before long.

Shares of online giant Amazon (NASDAQ:AMZN) were down 13.4% in after-market trading on 28 Jan 2016, more than giving back the 8.9% gain they had made on the day of the earnings call, after the company reported disappointing Q4 2015 results that failed to meet analysts' projections of results. Amazon reported revenue of $35.75B, good for 21.9% Y/Y growth, but $180M below consensus analyst estimates. It was Amazon’s bottom line performance, however, that did the company in. Amazon reported net income of $482M, or diluted EPS of $1.00, a record by the company and a huge 122% Y/Y growth compared to the prior year’s comparable quarter. Wall Street’s gripe, however, was that it expected Amazon to report EPS of $1.56. Amazon’s operating income of $1.1B during the quarter was close to the upper end of Amazon's guidance range of $80M-$1.2B for the quarter.

For the full year, Amazon's sales were up 20% to $107.0B - up 26% when you exclude the $5.2B unfavorable impact of currency headwinds. This marked the first year that Amazon’s full year sales crossed the $100B mark. Full year operating income improved dramatically from $178M in 2014 to $2.2B in 2015. Amazon’s net income also recorded a massive improvement to $596M, or $1.25 per diluted share, compared with a net loss of $241M, or -$0.52 per diluted share, in 2014.

Amazon provided the following Q1 2016 guidance:

  • Sales of $26.5B-$29B, or year-over-year growth of 17%-28%.
  • Operating income of $100M-$700M compared to $255M posted during Q1 2015 (57%Y/Y growth at the mid-point).

2015 therefore marked the most profitable year yet in Amazon’s 20-year lifetime, though this is not something you could tell looking at the performance of the Amazon stock immediately following the earnings call.

Outsized Expectations Drag Amazon Stock

Amazon’s Q4 2015 report was decent by almost any yardstick. Under any other circumstances, the investing world would be cheering the report. But the big problem here is that Wall Street and investors have built outsized expectations for the company. It has taken Amazon just two decades to hit $100B in sales, a feat that took Walmart (NYSE:WMT) 35 years, or almost double the time, to achieve.

Meanwhile, Amazon now seems to have hit a trajectory of consistent profitability after years of disappointing bottom line performance, thanks mainly to AWS. AWS posted revenue of $2.4B during the quarter, a healthy 69% Y/Y growth though considerably slower than 78% growth posted during the previous quarter.

But it’s AWS’ profits that have really been fueling Amazon’s resurgence. The cloud segment posted operating profit of $687M, almost triple the year ago number. AWS therefore contributed a good 62.5% of Amazon’s operating profit, underlining the importance of the cloud to Amazon’s operations.

Growth in Amazon third party sales, a more profitable segment than Amazon’s direct sales, is also responsible for Amazon’s improving profitability. Third party sales reached nearly half of Amazon’s merchandise sales during the fourth quarter.

Amazon’s operating costs rose 20.5%, 140 basis points slower than the company’s top line growth, which is an encouraging sign. Amazon’s shipping costs, however, hit $4.17B during the quarter after growing 37%. Shipping costs guzzled 12.5% of Amazon’s revenue up from 10.9% a year ago. Amazon’s swelling costs underline why the company is so intent on deploying drones in delivery services. It’s estimated that by deploying drones in delivery of merchandise to customers, Amazon can save as much as $2.8B annually in delivery costs.

Amazon Earnings - Investor Takeaway

Amazon seems to have hit profitability gear and its bottom line should keep expanding as the quarters roll on. Amazon’s latest set of results might have been disappointing, but that is only because expectations for the company were so high. Amazon’s profit is growing from a small base, and the company should have little trouble growing this metric at double-digits for several years. Once investor expectations get aligned with reality, Amazon stock will continue to perform well. Investors should not expect the Amazon stock to post triple-digit gains the way it did in 2015, after the company posted a series of surprise quarterly profits, since investors have now come to expect this from the company. But long-term investors can still make good gains on Amazon stock by holding the stock with a 3-5 year time frame in mind.

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  • I do not have any business relationship with the companies mentioned in this post.
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