After Last Week’s Earnings Miss, All Bets Are Off for Amazon Stock

Thomas Niel

Last week’s earnings release did little to impact Amazon (NASDAQ:AMZN) stock. Despite an earnings miss, shares remain in the $1,700-$1,800 range. With the company’s growth initiatives like one-day shipping, earnings will take a hit in the short term. But if this game changer pays off, the Amazon ecosystem could see big benefits.

AMZN stock
AMZN stock

Source: Sundry Photography / Shutterstock.com

Services like AWS could also help sustain 20% growth. But Amazon stock may already price in these factors. With this in mind, buying shares today may not be a great opportunity.

Let’s take a closer look, and see why Amazon stock is not a buy in the short term.

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One-Day Shipping, Cloud Competition Impact Amazon Stock

For the quarter ending Sept. 30, net sales grew 24% from the prior year’s quarter, to $70 billion. But operating income fell 15% year-over-year. A key factor in this earnings decline was one-day shipping. One-day shipping could help Amazon solidify its edge against online and brick-and-mortar retailers.

But short term, it’s a costly endeavor. Shipping costs went up 46% year-over-year, to $9.6 billion. The North American segment (which includes retail) saw sales climb 24% year-over-year. But with segment operating income down 37%, it may take a while for this to transform into greater profits.

Cash cow Amazon Web Services saw sales continue to climb. Net revenue was up 35% year-over-year. However, with new competition from Microsoft’s (NASDAQ:MSFT) Azure and others, AWS’s growth is starting to slow. With the pivot to the cloud, there is big opportunity. But as the cloud reaches critical mass, more tech competitors will enter into the fray.

This could impact AWS’s margins going forward. Operating margins are already starting to fall. AWS’s operating margins fell from 31.3% in Q3 2018 to 25.5% in Q3 2019. With AWS generating a majority of Amazon’s operating income, any negative impact to this business could impact the Amazon stock price.

For the fourth quarter (ending Dec. 31), Amazon’s guidance calls for lower earnings from the prior year’s quarter. Amazon expects sales growth of between 11% and 20%. Operating income is projected to fall from $3.8 billion in Q4 2018 to between $1.2 billion and $2.9 billion. However, analyst consensus projects higher profits in 2020. For FY20, analysts estimate earnings per share to be $27.71, a nice bump from 2019’s estimates of $20.61.

But the Amazon stock price may already reflect this future performance. Despite recent headwinds, shares continue to trade at a premium valuation.

AMZN Stock Remains Richly Priced

Compared to its FAANG peers, Amazon stock remains richly priced. The company’s forward price-to-earnings ratio is 86.6. The company’s enterprise value/EBITDA ratio is 26.7.

Here are the valuation metrics for the rest of FAANG:

  • Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL): Forward P/E of 27.1, EV/EBITDA of 17.1

  • Apple (NASDAQ:AAPL): Forward P/E of 19.1, EV/EBITDA of 14.5

  • Facebook (NASDAQ:FB): Forward P/E of 30.3, EV/EBITDA of 18.6

  • Netflix (NASDAQ:NFLX): Forward P/E of 86.3, EV/EBITDA 55.6

As it stands now, AMZN stock trades at a higher forward P/E than NFLX stock. NFLX trades at a much higher EV/EBITDA ratio, but Amazon’s EBITDA multiple vastly exceeds its FAANG peers. High expectations remain for Amazon’s future. But with shares priced for perfection, things could change on a dime if the company fails to meet expectations.

What are the odds the company makes a major misstep? In hindsight, one-day shipping could be a costly mistake. If it results in so-so revenue growth but declining profits, the Amazon stock price could take a dive as investors stop rewarding the company with a premium valuation.

A ‘Wait-and-See’ Situation

All bets are off for AMZN stock. The company’s one-day shipping may be a potential death knell to retailers. But for now, it’s a costly initiative. Even with the upcoming holiday season, earnings per share for the year-end quarter may be less than Q3 results.

Analyst consensus for Amazon stock earnings remain positive. Based on projections, the FY20 earnings could grow materially over FY19 results. AWS continues to see high growth, but with new competition, margins will likely fall further. With AWS’s profits fueling other growth areas, this could be an issue down the road.

But as I have discussed previously, AMZN stock has other growth drivers in the pipeline. The company’s “Go” technology and digital advertising business could grow into future business-to-business cash cows like AWS.

So what’s the play? Wait for the Amazon stock price to fall further. While this is easier said than done, if current concerns accelerate, investors will have a chance to enter a position at a more attractive price.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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