Amazon, Inc: Stock Prices Recovering on Stronger Earnings Outlook

By Richard Cox

• Stock market destruction continues and companies with a deep connection to the technology sector have been some of the hardest hit.
• After reaching its highs above $2,000 on September 4th, Amazon has fallen sharply (with the stock losing 36.26% of its value by Christmas Eve).
• But there is very little reason to believe that these declines are justified when we consider the Amazon’s underlying earnings outlook.
• Strong consumer spending at the macro level suggests Amazon’s guidance figures following third-quarter earnings may be far too low.
• Upside earnings surprises (relative to weak expectations) should help AMZN extend the rally which began near the end of December.

As widespread destruction continues to ravage stock markets, some of the deepest pain has been felt by those long Amazon, Inc. (AMZN).  After reaching highs of $2,050.50 per share on September 4th, the stock lost 36.26% of its value when it reached its lows of $1,307.00 on Christmas Eve.  Reversals this forceful can test the will of even the most stalwart and loyal investors. But there is very little reason to believe that these declines are justified when we consider the company’s underlying earnings outlook.   

Last holiday season, positive trends in consumer spending put Amazon in a strong position to continue with its consistent streak of earnings outperformance relative to the market’s expectations. As a result, contrarian traders may consider long positions in AMZN with a rising potential to capture significant upside once bearish volatility in the broader market begins to stabilize.

(Prior declines posted near the end of 2018 have soured the tone and put markets on edge with respect to the ability to take aggressive positions in potentially volatile stocks like AMZN.  But share prices have already started to break the downtrend channel which defined most of those declines. Moreover, early fundamental indicators appear to be highly supportive for the current earnings outlook.  In a recent statement, Amazon announced record performances in its 2018 holiday sales figures, and this presents a stark contrast relative to what has been outlined prior estimates.  

Without disclosing specifics with respect to global sales revenue, Amazon has indicated that the company sold more items than it has at any other point in its holiday season operations.  This has helped the stock generate a sharp reversal from the lows and erode the negative tone which was set after Amazon released weaker-than-expected guidance figures for the fourth-quarter.  With the company’s prior earnings release, Amazon revealed subdued expectations for its operating income figures (indicating minimal growth rates relative to the seasonal performances of 2017).  

For the fourth-quarter, Amazon submitted expectations of $2.1 billion to $3.6 billion.  This broad range was vague and disappointing enough on its own. But it was also significantly lower than the consensus estimates amongst analysts (which called for $3.9 billion in operating income for the period).  This perceived weakness pushed the stock off its highs and placed investors in precarious territory, even before a massive spike in volatility hit the tech sector during the final months of 2018.

Essentially, these events made AMZN bulls highly vulnerable to the exacerbated declines which occurred in the periods that followed.  Over the last ten years, only Netflix (NFLX) has proven to be more “astronomical” in terms of its ability to generate forceful rallies.  

Unfortunately, the lack of clarity in Amazon’s latest performance statement means that long investors will be forced to wait until earnings are released again in February before we can actually see the impact of positive macro trends in consumer spending.  But what we do know is that it will not be overly difficult for Amazon to beat its already-weak guidance figures, and last quarter’s decline in share prices has created an environment which is ripe for extended upside reversals in AMZN.

The good news is that Amazon has developed an incredibly strong history in terms of its ability to surpass stated earnings expectations.  Over the last four quarters, Amazon has beaten EPS estimates on every occasion (by an average of 90.79%). It is true that these performances have been overshadowed by the company’s disappointingly weak guidance figures.  But the macro data remain supportive and suggest that an upside surprise could be in store for Amazon’s next earnings report.

According to figures released by Mastercard SpendingPulse, U.S. retail sales reached $850 billion during the period extending from November 1st to December 24th.  This represents an annual gain of 5.1%, and it marks the best macro sales performance in six years. In its report, Mastercard also indicated that online sales rose by 19.1% on an annualized basis and these are trends which could disproportionately influence price moves in AMZN.

Of course, this does not mean that Amazon will be the only beneficiary of an improving consumer sales environment.  But it does lend supportive credence to Amazon’s recent performance statements and this should be viewed as encouraging for those considering long positions in the stock.  Earlier this year, Amazon said that it had 100 million Prime subscribers around the world.  This trend is continuing strongly, as Amazon has said that the company attracted “tens of millions” of new users this holiday season (including those signing up through free trials) and generated record sales of smart home devices like the iRobot Roomba 690 vacuum cleaner, the Ring Video Doorbell 2, and the Amazon Smart Plug.  

Amazon’s Alexa app (which is used to control smart home devices with the Alexa virtual assistant) was also the most downloaded item in the Apple App Store and Google Play store this Christmas.  It is true that a strong undercurrent of uncertainty persists throughout the market.  But contrarian traders should be asking themselves important questions after the massive declines we have seen in tech-sector stocks over the last few months.  Will this be enough to give Amazon the edge when the company reports earnings for the current quarter? It may be too early to tell given the vague nature of Amazon’s public releases.  But when we view these contextual trends alongside Amazon’s weak guidance figures (and the resulting collapse in share prices), it seems that AMZN bulls could be setting up for a stable move higher in the early parts of this year.  

Looking at the market activity displayed over the last few years, we can see that AMZN stock generally performs well after the company beats market expectations for earnings.  A glaring exception can be found in the reactions which followed the Amazon’s most recent earnings release, and this negative example should not be forgotten in the current environment.  But at least part of this bearish activity can be attributed to the underlying turmoil which has been present in the stock market as a whole (and tech stocks, in particular). This places a much greater level of importance on Amazon’s next earnings release, and the consensus forecasts are currently calling for EPS of $5.48 for the quarter.  

If realized, this would mark an annualized gain of 153.70%, and an earnings performance this strong would could the stock in an excellent position to extend on its recent moves higher once volatility in the broader market begins to stabilize.