Amazon.com (AMZN) stock is up about 3% today on earnings results in line on revenues and ahead on profits.
But despite decent margins data this time for Amazon stock and continued strength on the top line, investors should be worried that the party will end soon and Amazon stock may take a spill.
That’s because Amazon earnings specifics weren’t as good as Wall Street’s reaction. The AMZN guidance was below the consensus, and earnings tallied a 2 cent loss vs. a 5 cent profit forecast.
Simon Baker of Baker Avenue Asset Management told Jeff Macke of Yahoo! Finance in a recent interview that profits can only be overlooked for so long, and his quote just about sums the situation for me:
“It was the best third quarter since inception but they continued to invest in infrastructure at the expense of profit. At some point they’ve got to start showing some profits. That’s where the question is.”
Thus far investors have been content to sit back and watch Amazon earnings with an eye only on the top line — since reach and revenue seem to be the driving factor behind Jeff Bezos & Co., not EPS targets.
Thus investors bidding up Amazon stock to forward P/E north of 100 in anticipation of future Amazon earnings despite current break-even status.
But you have to wonder when the expense of building out warehoues and digital content and hardware like the Kindle will eventually not yield enough revenue, either.
After all, the tablet space is growing fast but may slow soon. Consider in its latest earnings report, Apple (AAPL) revealed its iPad sales dropped 14% in the quarter vs. the same period last year. There’s talk about a bigger iPad with a focus on productivity instead of entertainment which could open up big enterprise sales potential… and that could juice sales short-term as people upgrade or switch, but it’s still chasing the latest product update instead of finding new markets or consumers.
The same headwinds face the Kindle for Amazon.
There’s the same tale with streaming video. Netflix (NFLX) saw some headwinds as its growth slowed in its most recent quarter, and with fierce competition and the high cost of content acquisition its very costly to chase growth right now. That goes for Netflix, YouTube via Google (GOOG), Hulu Plus — and of course, Amazon.com with its Prime on-demand video streaming service.
Then there’s the continued race to the bottom in e-commerce where Wal-Mart (WMT) and Best Buy (BBY) have become part of the deflationary price spiral with their ever-lower online sales offerings. Even if it wanted to, Amazon couldn’t reverse this trend to boost profits or revenue in this razor-thin online sales game.
It all adds up to a very tenuous situation for Amazon stock.
Of course, that hasn’t stopped AMZN over the last few years. Jeff Bezos hasn’t cared a whit about profits for a long time and the stock has soared 300% in the last five years in spite of this. So why should things change now?
There’s a chance Amazon stock could just keep chugging higher as it puts everything behind revenue growth. But if that revenue growth stalls or Wall Street changes its mind about the importance of profitability… it will get ugly real fast for AMZN stock.
- Amazon earnings details. (Bloomberg)
- How can AMZN move higher on this data? (Breakout via Yahoo! Finance)
- Mark Vickery rightly points out that Jeff Bezos could care less what AMZN stock does. (Zacks.com)
- Before earnings, Brian Stoffel offered three reasons to sell Amazon stock. (The Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.