Amazon beat the Street in every way possible – here’s why the share price went down
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Amazon beat the Street in every way possible – here’s why the share price went down

Ecommerce giant Amazon finished last week with a keenly-awaited earnings report. Investors and analysts got a pleasant surprise as the company delivered solid outperformance on every single metric that analysts care enough about to predict. That’s a good thing, right? You might be forgiven for thinking otherwise, given the share price’s movement after the event. So why did it trade down? It’s that same old story: predictions investors don’t like the sound of.

Investors punished Amazon for plans and predictions they didn’t like the sound of

graph 05 amazon

Source: Yahoo Finance

First off: how bad was the damage? Well, investors sent the share price down by around 6% at the end of the week – that’s significant, but let’s face it: Amazon’s still up by more-than 10% this month (and by extension, this year). Is double digit growth in 30 days something to cry about? Hardly.

Second: just how well did Amazon actually do? The answer is: incredibly. Remember, Amazon expectations tend to be high – people know just how powerful Mr. Bezos’s brainchild is. When you add in how much the company outperformed analysts’ expectations, it’s easy to see that the company’s incredible growth story is not just continuing, but continuing apace.

Amazon reported earnings per share of $6.04, trouncing analysts’ hopes of $5.68 per share. It also beat the Street’s expectation on revenue by around half a billion, reporting $72.4 billion against consensus estimates of $71.9 billion. Both of these figures were solid advances on the comparable quarter from last year, and both of them set new records for the company. It’s also worth mentioning that Amazon Web Services (AWS), probably Amazon’s most visible latter-day growth driver, saw revenues of $7.43 billion against expectations of $7.3 billion. That’s a big deal, because analysts weren’t being conservative with AWS’s growth estimates.

So, what drove the share price down? Well, first of all, lines like this: “I would expect investments to increase relative to 2018.” That was the message sent out by Amazon’s chief financial officer, Brian Olsavsky, on its earnings call. Investors rarely like it when companies threaten to spend loads of money – although in this case, some of the people holding Amazon must have very short memories, because reinvestment-over-profit is literally the strategy that made the company a world-beater.

Other things that damaged Amazon’s share price include less-than stellar guidance for the first quarter of 2019 (the company expects revenues of between $56 billion and $60 billion – analysts see it returning $60.8 billion), and concerns over India. In regards to the latter, regulators are considering the implementation of rules that will make it much more difficult for big foreign players to get a foothold in its fast-growing ecommerce market.

But these concerns are, ultimately, the small print on an incredible growth story that is seeing Amazon win the war for online-offline connectivity, web hosting, personal virtual assistants, and more. Here’s a sign as to how Amazon’s business is going: on Thursday afternoon, it was the world’s biggest company by market cap – and it’s still expanding into some of the world’s biggest growth markets. To most sober heads, that doesn’t scream ‘panic’.

Disclosure

Dominion holds Amazon in its Global Trends Ecommerce Fund.


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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.