Market's Reaction To Amazon's Quarterly Earnings Report Creates a Buying Opportunity

10/30/2016

I recommended buying Amazon at $328.98 in April of 2014. I think it's still a "strong buy" today.

On Thursday, Amazon reported their latest quarterly results. Revenue increased 29% to $32.71 billion, beating projections of $32.69 billion. Earnings per share (EPS) rose 205.9% from $0.17 per share to $0.52. Revenue from its most profitable unit, Amazon Web Services (AWS), jumped 55% year over year to $3.23 billion, exceeding Wall Street’s estimate of $3.19 billion. All of this is fantastic growth. So why did the stock fall 5% the day after the results were announced? Because the company is aggressively reinvesting in fulfillment centers, retail, media, technology, transportation and logistics with the result being profits did not reach the $0.78 EPS estimate Wall Street had anticipated.

Amazon is still amazingly early in its growth phase. The mature phase of slow growth and predictable earnings is a long way off. Amazon isn’t satisfied being the dominant online retailer in the U.S. It wants to be the same in India, a huge market in which it increased investments this quarter. Additional investments in original streaming content has put substantial pressure on Netflix while attracting more Prime members. AWS already has a dominant market share, but is growing furiously.

And Amazon is eyeing having a major presence in the $800 billion grocery market. Internal documents recently revealed a plan to operate a 20-location pilot program of grocery stores. Ten will be "click-and-collect" drive-up spots with the other 10 being traditional grocery stores. If the pilot program is successful, Amazon could open 200 stores a year for a decade, for a total of 2,000 grocery stores. Walmart executives must be having sleepless nights over this possibility.

So Thursday’s quarterly earnings announcement flushed out the short-sighted shareholders who were hoping Amazon had switched from a long-term growth story to a maximize-profits-at-the-exepense-of-growth strategy. To maximize profits, Amazon would need to curtail reinvesting in itself, the very thing that has made Amazon so successful.

Investors who want a predictable, steady, slow-growing stock should look elsewhere. Amazon will continue to grow, and its investments will be lumpy. Don’t expect Bezos to sacrifice growth to satisfy Wall Street’s short-term goals.

So I view the most recently quarterly results as an indicator that Amazon’s long-term growth story is very much still intact and holds the most promise of any growth stock in the world. Especially when one considers that Amazon’s two main markets, retail and cloud-computing, are only about 10% penetrated.