Amazon Crashes After Earnings: Buying Opportunity?

Amazon missed earnings, but the online retailer is still an extraordinary growth company with plenty of upside potential in the long term.

Jan 31, 2014 at 5:35PM

Amazon.com (NASDAQ:AMZN) stock was down more than 11% in late-day trading Friday after the company delivered a disappointing earnings report for the fourth quarter of 2013. However, the online retailer is still outgrowing competitors by a wide margin, be it e-commerce companies such as eBay (NASDAQ:EBAY) or brick-and mortar chains like Wal-Mart (NYSE:WMT). Should investors capitalize on the opportunity to buy Amazon at a discounted price or is the worst yet to come for the company?

The numbers
Sales increased by 20% to $25.59 billion during the fourth quarter of 2013. Excluding the negative impact from foreign exchange fluctuations, net sales grew 22% versus the fourth quarter of 2012. The number was marginally below Wall Street analysts' expectations, but within the company's own guidance of $23.5 billion to $26.5 billion for the quarter.

Operating income increased 26% to $510 million in the quarter versus $405 million in fourth-quarter 2012. Earnings per share increased materially to $0.51 per diluted share, compared to $0.21 per diluted share in the same period of the previous year. Analysts on average had forecast a higher earnings-per-share figure of $0.66 for the quarter.

For the first quarter of 2014, Amazon expects revenue in the range of $18.2 billion to $19.9 billion, an annual growth rate of between 13% and 24% from the first quarter of 2013. Wall Street analysts are forecasting sales of $19.67 billion for the quarter, so the company's midpoint guidance is also below those projections.

Moving forward
Amazon said it was considering raising prices for its Amazon Prime service in the U.S. by between $20 and $40. The service provides unlimited free two-day shipping and other benefits for $79 per year. The price has remained the same since Amazon Prime was launched nine years ago, and factors such as rising fuel and transportation costs, as well as increased use by members, are having a negative impact on Amazon's profit margin.

Amazon says it has "tens of millions" of Prime members, and the service is a key competitive strength for the company as it consolidates customer loyalty and increases purchase amounts per order and per customer. Membership continues to grow at remarkably strong rates; Amazon said it even had to limit new Prime membership sign-ups during peak periods in December due to capacity constraints.

Considering demand strength, it looks like Amazon could have room for price increases without hurting growth too much. Higher membership fees could mean higher revenue without any material increases in costs, so that should have a big positive impact on profitability.

Industry context
The numbers came in below analysts' expectations, but Amazon continues to perform remarkably well for a business of its size. The retailer continues to gain market share versus different kinds of competitors, consolidating its competitive strengths and positioning itself for growth in the years ahead.

eBay reported a 13% increase in revenue to $4.5 billion for the fourth quarter of 2013. While PayPal delivered a big increase of 19% in sales for the period, eBay Marketplaces produced a much slower growth rate of 12% during the quarter. eBay is still delivering solid performance, but Amazon seems to be clearly outgrowing its main competitor in the e-commerce business. 

Brick-and-mortar retailers have faced an aggressively challenging environment lately, and recent news from industry bellwether Wal-Mart confirms that there is no turnaround in sight in the short term. Wal-Mart announced on Friday that earnings for the fourth quarter of fiscal 2014 will likely be at the low end, or slightly below, the company's previously issued guidance, and the same goes for comparable-store sales in the U.S.

It's important to keep in mind that the previous guidance was already quite uninspiring. The company expected flat comparable-store sales in Wal-Mart U.S. and an increase of only 2% in Sam's Club comparable-store sales excluding fuel, so things seem to be going from bad to worse for many traditional retailers lately.

Foolish takeaway
Amazon's sales and earnings came below analyst expectations, but the company is still delivering outstanding performance for a business of its size and doing considerably better than competitors such as eBay and Wal-Mart. Besides, price increases for its Amazon Prime membership could provide a considerable boost to profit margin in the future. Amazon is still an extraordinary growth company with outstanding potential; the lower the stock price goes, the higher the expected returns for long-term investors.

Want ultimate growth in your portfolio?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Andrés Cardenal owns shares of Amazon.com. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers