What, Bezos Worry?
Is Amazon chief Jeff Bezos a madman or crazy like a fox? Amazon shareholders have some steam coming out of their ears over the company's dreadful Q2 earnings report, but share prices are just numbers, after all. In the past, "investors willing to step in to buy after a sharp drop in Amazon's share price have been rewarded for their bravery," said Covestor portfolio manager Barry Randall. "So far."
07/25/14 2:53 PM PT
Amazon may wow customers with its extraordinary array of products and customer services, but its shareholders are less-than-impressed at the moment.
The company on Thursday announced second-quarter losses that were nearly double what analysts had been expecting. Furthermore, Amazon informed shareholders that third-quarter earnings were likely to be just as dismal, if not worse.
Wall Street wasted little time reacting: Amazon shares dropped some 9.5 percent in after hours trading, wiping out roughly US$15 billion in value overnight.
Analysts had been expecting a loss of 15 cents per share, but Amazon reported a net loss of 27 cents per share, or $126 million. Compared with a net loss of $7 million, or 2 cents a share, in the comparable quarter in 2013, the loss was gruesome.
Amazon's Q2 2014 net loss was bad enough on its face, but it also served as a reminder that the company has not delivered a profit in some time.
The disgruntlement with Amazon was so strong that shareholders tended to overlook one of the bright spots of the earnings report -- the 23 percent year-over-year increase in net sales the company posted, for a total of $19.34 billion.
Profits Trump Innovation
Amazon as a company is clearly successful. What has aggrieved shareholders and analysts is the narrative that CEO Jeff Bezos is on a spending spree, investing in technologies with a payday that is far off at best and highly speculative at worst.
The new Amazon Fire Phone, for example, sucked up significant resources and managerial attention -- and though it's just beginning to find its way into consumers' hands, many investors fear it will be a bust.
Of course, Bezos' investments often have paid off quite nicely. Amazon has pushed the envelope in a number of areas, from its data center services to the launch of the Kindle e-reader several years ago.
"Jeff Bezos is probably the greatest innovator in American capitalism alive today," said Charles Sizemore, a portfolio manager on Covestor -- and a legion of fans would agree.
"For all intents and purposes," Sizemore told the E-Commerce Times, "Bezos invented e-commerce as we know it."
Investors realize this, Sizemore said, but they nevertheless are getting tired of Amazon's string of losses.
Amazon has moved out of the startup phase into the mature established corporate phase, and for many of its shareholders, profits are the top concern.
"Amazon has had a free pass from investors who were willing to sacrifice current profitability for future growth," Sizemore said, "but now, it's time for Amazon to focus. Bezos tends to pursue multiple strategies at the same time, many of which don't pan out."
A Buying Opportunity
Because of the company's long-term fundamentals, the stock dump represents a good time for investors to buy if they want more exposure to this stock, which typically is considered overpriced.
Three years ago, on July 26, 2011, Amazon reported a solid second quarter and provided disappointing margin guidance for the third quarter, recalled Barry Randall, technology portfolio manager for Covestor. Over the following month or so, its stock fell 16 percent to $179 per share.
"From that point until yesterday, Amazon stock rose 101 percent to $358 per share," Randall told the E-Commerce Times.
"By comparison, the S&P 500 and the Nasdaq Composite rose 76 percent and 90 percent, respectively, during the same time frame," he pointed out. "Now, Amazon shares are 'on sale' once again."
Amazon's share price is no longer a proxy for the viability of its business model, Randall concluded. It's just a share price, "and investors willing to step in to buy after a sharp drop in Amazon's share price have been rewarded for their bravery. So far."