What Traders Missed About Amazon (AMZN) Over the Years

I recently wrote about the earnings disappointment for Amazon.com, Inc. (AMZN). The company missed revenue estimates, dropping the stock down 7.6% on earnings day. 

Management citing slower sales growth in third quarter was the main catalyst: falling from 20%-plus to an expected 10% to 16% for next quarter. Comps will be tough to beat, which has some investors worried.

Key Takeaways

  • Amazon recently missed earnings.
  • Keep in mind that Amazon's shares are getting cheaper as earnings increase.
  • Big earnings attract Big Money buyers.

Again, this "return to earth" was expected, but this company's outlier growth story perhaps has led tough-to-meet investor expectations. However, it's important to realize that Amazon's long-term plan is coming to fruition. I believe it's only the beginning.

Management has been placing a focus on long-term free cash flow. What started and remained as a money-losing business for years continues to blossom into a great profitable business.  Amazon's main retail business is low-margin and high volume. Once the corner was turned and wide-spread reliance was built, it virtually ensured that it's going to be hard to compete and even harder to threaten Amazon's successful foundation. 

The words investors and traders are often interchangeable these days, but there is a crucial distinction.  Those who bought into Amazon's vision early and held through the lean years are the investors. And those who look for quick profits are the traders. 

When stocks react due to negative earnings surprises, make no mistake—that's the hallmark of traders. By nature, traders are speculators betting on the near-term future value of something. They tend to fixate on very near-term events—like a revenue growth slowing or a dilutive purchase.

But an investor would do well to look long term. As for Amazon, the retail business, while low margin, is gigantic and is the bread-and-butter, while other seemingly unrelated businesses incubate.

Cloud computing division Amazon Web Services (AWS) is an awesome high-growth enterprise software business of the highest caliber. Early investors thinking online bookselling was a clever idea likely never foresaw this growth engine. What is also interesting for the future is that Amazon's new CEO Andy Jassy basically built AWS. So, his vision for the future of this growth unit has clear long-term positive implications.

In addition to online retail and cloud, Amazon has some of its tentacles in media, advertising, software, hardware, and logistics that we know of. Oh—let's not forget Prime, which is also growing like a weed. Lastly, Amazon is buying MGM for $8.45 billion (still subject to FTC approval). This is presumably an Amazon Prime Video play to boost content offerings and growth in popularity to compete with Netflix, Inc. (NFLX) more respectably.

So, if we take an investor's view on this growing conglomerate, let's look back at some key things that focusing on this momentary earnings disruption misses.

This is a big one: Amazon is trading at its cheapest valuation in at least five years (perhaps more using certain metrics). Here we look at a price-to-earnings (P/E) chart over time starting in 2016.  We see it gradually falling.

Chart showing the P/E ratio of Amazon.com, Inc. (AMZN)


While a current price-to-earnings ratio of 58x might seem high in a vacuum, keep in mind that the company was not profitable for a long time.  In fact, it took 14 years for Amazon to make cumulatively as much profit as its first $1 billion plus quarter, when it reported $1.86 billion in net income for fourth quarter 2017.

Quarterly net profit of Amazon.com, Inc. (AMZN)

Atlas, FactSet

So that brings us to earnings. Now that earnings have been positive for a few years, let's talk about P/E ratios.  If a P/E is falling, investors perceive that the stock is getting cheaper. That happens mainly in a few ways:

  • The stock price falls while earnings rise or stagnate.
  • Earnings rise while the price falls or stagnates.
  • Earnings rise while outpacing a simultaneous rise in share price.

The last and most desirable one holds true for Amazon.  Here we look at the P/E chart again, but added are charts for the price and earnings trends:

Earnings for Amazon.com, Inc. (AMZN)


The stock is getting cheaper in value while getting more expensive in price and growing earnings. I find this particularly interesting because when a fundamental story as strong as this one sticks around, big money investors usually do too. And we have great evidence that Wall Street isn't done with Amazon by any stretch of the imagination, despite any doom and gloom from earnings headlines.

In the table below, we examine instances of big money buying from MAPsignals.com. 

Big Money data for Amazon.com, Inc. (AMZN)


What's fascinating is that Amazon stock appeared 32 times on the top 20 buy list starting July 28, 2015 and is up 535.3% since. On this TradingView chart, we can when buying started and a few of those signals the past seven years:

Share price performance of Amazon.com, Inc. (AMZN)


Here's why I am showing this: Amazon sank more than 11% from its highs after the last earnings call. But don't let the short-term noise rattle investor focus. Big money has been buying this stock for years.

Traders can focus on the blips and bleeps, but investors are best suited to look under the hood and recognize that Amazon is here to stay for a long while. And just as early investors don't recognize the current Amazon from the humble book-selling days, I believe that, in the future, we won't recognize Amazon from the online-retail giant it is today. Bright things are ahead for Amazon.

The Bottom Line

Amazon missed earnings. Traders are fearful, but long-term investors have been rewarded massively. Earnings have been growing, attracting Big Money buyers throughout the years. Over time, it has paid off to bet on Amazon. This author wouldn't fight that trend.

Disclosure: The author holds no position in AMZN at the time of publication.

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