No: Amazon’s earnings tell

September 19, 2017 03:38 PM

My first investment in Amazon (AMZN) was initiated on Feb. 5, 2015. At the time, the stock was trading at $377.72 per share. We finally started seeing those skinny margins begin to add up to some meaningful earnings and earnings expectations.

If there is one thing that you pick up after two decades of following research reports as a professional money manager, it is that stocks and indexes follow earnings.

It’s pretty simple. When earnings are going up, the index and stocks follow right along, unless of course, the index gets too expensive.

As long as the earnings continue to grow, the stock follows right along. Facebook (FB), Netflix (NFLX) and Amazon (AMZN) are good recent examples of that.

When earnings growth begins to slow, so does the stock price appreciation. Stocks like Coca-Cola (KO), Cisco (CSCO) and Intel (INTC) are good examples of that.

When earnings begin to decline, look out because the stock will follow right along. IBM, General Electric (GE) and Exxon (XOM) are good recent examples.

This is why quarterly and annual earnings reports are watched so closely. They are the best evidence and indicators of the trajectory of earnings and future expectations. If a company misses expectations and guides lower, the stock immediately adjusts lower. Conversely, if a company exceeds estimates, the stock will almost always break out to new recent highs. We saw this with Boeing (BA) and Caterpillar (CAT) in late July.

My initial long on Amazon in early February of 2015 followed expectations its earnings were finally starting to ramp up.

After losing 52¢ per share in 2014, expectations were for Amazon to turn profitable in 2015, which it did. Amazon ended up making $1.25 per share in 2015 after that 2014 loss.

But the real number that caught my eye was its 2016 expected earnings growth of more than 300%. AMZN exceeded that, reporting annual earnings of $4.90 per share in 2016, nearly 4X its 2015 earnings.

By late October of 2016, my position in Amazon was up 105%, and we were headed into the last few weeks of a hotly contested presidential election. Amazon had become a bit pricey at that point, so I took profits on Nov. 2, 2016, at $776 per share, a gain of 105%. Initially, this turned out to be a good move as the election did not go as expected and the tech stocks suddenly took a back seat to the banks and financials.

AMZN made multi-month lows in mid-November and earnings expectations began to ramp up once again. I got back in on Jan. 12 at $804.86 per share.

The stock has been one of the biggest winners in the market in 2017. That Jan. 12 position was up more than 25% by June and earnings expectations continued to go higher as Amazon took on one business after another.

By June 19, 2017, Amazon’s shares were up 50,293% since its 1997 debut. Amazon chief Jeff Bezos had become the second richest man in the world and would soon pass Bill Gates at #1. He actually did pass Bill Gates briefly in July on the morning Amazon hit new all-time highs.

But then, something happened later that morning before the company was to report after the close. The stock and the Nasdaq began turning around and selling off quite aggressively. Amazon earnings fell far short of expectations after the market closed. It is hard for me to believe that some big players did not know that Amazon was going to whiff big time on its after-hours report. Nothing else would explain that sudden mid-day turnaround.

Amazon’s Q2 earnings report was one of the biggest whiffs in a long time. I exited the long the following week.

On June 19, AMZN was expected to earn $12.43 per share and continue to grow by 29% per year over the next five years. My five-year target was $1,635. Following Amazon’s disappointing report, the consensus earnings estimate for 2018 have plunged from $12.43 per share to $8.76 per share. This 29.5% drop in expectations is one of the quickest and most stunning turnarounds in the expectations for a stock.

It is bit strange to see that the stock is only down 6.2%, while earnings expectations have plunged by 29.5%. It may have further to fall before earnings expectations rebound.

Just when a company and its CEO seem invincible, you realize that the company is going through some severe growing pains. It’s time to look elsewhere while Amazon sorts some things out.

Disclosure: The author has no positions in any of the stocks mentioned.

About the Author

Bill Gunderson is a wealth manager and president of San Diego-based Gunderson Capital Management, and the creator of the Best Stocks Now app.