Amazon winning by
losing?
AMZN and AAPL are both great companies with the beneficiary
being the consumer. As an analyst this got me thinking more about their recent
earnings reports and the differing share price reactions. Both companies
reported earnings last Friday, both gave lower than expected forecasts but the
share price reactions could not have been more different. AMZN posted its first
losing quarter in more than 5 years and AAPL guided EPS to be down year on year.
Both not great outlooks but very different share price reactions with AMZN up
6.87% and AAPL down 0.91%
Earnings, earnings,
earnings
Putting the investment hat on it and considering earnings it turns into a one horse race.
Shares typically increase inline with earnings similar to what AAPL shares have done over the past
few years. In the five year chart below
you can see that the earnings line in pink roughly traces the direction of the share
price.
AMZN differs in that its share price is increasing inline
with earning promises. The investment story is that AMZN is the
dominant player in e-commerce and is making huge investments now that will pay
off later. But wait a second aren’t they already the dominant player, how much
longer do we have to wait? Sales have increased rapidly but not the bottom
line. It is the right thing to reinvest but after a number of years there
should be results. In the five year chart below earnings for AMZN have
decreased but shares have continued to rise, increasing the risk for investors
as the promise of profitability is pushed out further and further.
Valuation is a great way to know if a stock is appropriately
priced as it shows what assumptions investors use to justify the share price.
As we all remember when valuation tools such as eyeballs or metrics other than
earnings are used investors should be wary. In AMZNs case it trades on a
multiple of 131 times next years profits. Analysts try to make buyers feel
better by valuing it on other metrics such as 25x free cash flow or on discounted cash flows.
A great company is not
always a great stock
I understand that investing money is very different from
losing money. It’s just that AMZN is already the dominant player and after reinvesting
money over a period of years has not substantially increased margins or earnings, its losing money. The share price
assumes that AMZN will be successful, when AMZN translates this success to
profits there will be not much upside left for investors as the success is
already priced into the shares. As an investor I’m on the sidelines, I think I will benefit more as a consumer and not investor of the site.
Jason
Disclosure: Decisive is long AAPL
and has no position in AMZN
The
material in this article is for informational purposes only and in no way
constitutes a solicitation of business or investment advice. The material has
been prepared without regard to any client's or other person's investment
objectives. Before making an investment decision you should consider the
assistance of a financial adviser and whether any investment or service is
appropriate in light of your particular investment needs.
