Amazon.com Inc. reported its fourth quarter (Q4 2015) earnings last week and the stock has been beat up ever since. The U.S. stock market is currently seeing high volatility and the market isn’t having second thoughts about punishing any stock that shows weakness. Amazon failed expectations on the top and bottom lines and the market has slashed almost 10% off its share price. Last Friday, shares of Amazon were down 7.61% to close at $587.00.
The drop in the shares of the firm shows that the stock is slowly moving from being a Wall Street darling to being an outcast on the market. You’ll remember that Amazon was the second best-performing stock in the S&P 500 last year, behind Netflix. This piece seeks to explore why the market is overreacting to Amazon’s earnings and why analysts are still bullish on the prospects of the firm going forward.
Amazon is being punished unfairly
In the first one month of 2016, Amazon has largely underperformed the general market as its share price starts to crash as seen in the chart above. You’ll observe that the shares of Amazon have dropped 13.2% in the year-to-date period and it posts bigger losses than the general market. For instance, the S&P 500 was down 4.98%, the Dow Jones Industrial Average was down 13.2%, and the NASDAQ Composite was down 6.58%. The drop in Amazon’s share price shows that the market was clearly disappointed with the earnings.
In the Q4, Amazon posted earnings of $1.00 per share below the market forecast of $1.56 per share. The firm posted revenue of $35.7 below the market forecast of $35.93B. The EPS and revenue looks to miss the analysts’ forecasts but it might interest you to know that earnings almost doubled from the year-ago quarter and revenue was up by 22% year-over-year.
What did Amazon do wrong?
Amazon delivered impressive results but the reason the stock is being punished is not because of the reported numbers but because of the expectations in the market. The Q4 report has dashed the hopes of some investors who bought the shares after Amazon posted a profit in Q4 2014. Jeff Bezos has not been profit-driven, as he has focused on sowing profits back into his business.
The lack of interest in profits made Amazon a momentum play that thrived on news and value investors who wanted earnings stayed away from the stock. For instance, Michael A. Yoshikami, CEO of Destination Wealth Management, told CNBC that “as a fundamental investor, we are staying away from Amazon for the time being. When the valuation is more reasonable…and we have better clarity as to its plan to start turning a profit…we might jump in.”
However, when the firm posted profits in Q4 2014, it attracted fundamental investors who thought that Bezos has had a change of heart and the he now wants to focus on profits; hence, many value investors bought the “pricey” shares and the result was 118% increase in share price in 2015. Now, the Bezos has shown that he is more interested in growth than profits, those profit hunters are taking their money out of the firm, and the share price is tanking.
Analysts remain bullish on Amazon
Analysts on Wall Street understand the dynamics at play on the shares of Amazon and they are mostly keeping their bullish thesis on the stock intact. For instance, the consensus price target on the stock has dropped from $748.67 per share to $738.50 per share; yet, the price target still marks a 25.7% premium to Friday’s closing price of $587.00.
More so, analysts at JPMorgan maintained their overweight rating on the stock and they increased their price target by 3.13% from $800 to $825. Analysts at Raymond James have a “Strong Buy” rating on the stock, and they have increased their price target by 2% from $745 to $760. More so, analysts at S&P Capital IQ raised 2016 EPS to $0.91, they set 2017 EPS at $9.98 and they maintained a “Buy” rating and a price target of $685.