Here's How Amazon.com Disappointed

Russia’s saber-rattling (and actual saber-unsheathing) in or around Ukraine has been weighing on the mind of the market since yesterday -- this is as good an explanation as can be found for stocks’ lower open on Friday morning. The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) are down 0.4% and 0.57%, respectively, at 10:20 a.m. EDT. Microsoft (NASDAQ: MSFT  ) , which reported solid quarterly results after the bell yesterday, is bucking the trend: shares are up 1.2%. (Here is my review of the company's results.) By contrast, Amazon.com's (NASDAQ: AMZN  ) earnings report, which also came in yesterday afternoon, is getting a cold reception from investors; the e-commerce king's shares, down 8.5%, are significantly lagging the market this morning.

Strictly in terms of its headline first-quarter numbers, Amazon did enough to satisfy, if not delight, investors: revenue of $19.7 billion exceeded analysts' consensus estimate by 2%, as did EBITDA of $1.5 billion. (EBITDA, or earnings before interest, taxes, depreciation and amortization, is a rough measure of cash flow.) Meanwhile, earnings per share of $0.23 was in line with Wall Street's expectations, though analysts' EPS forecast had come down from $0.54 three months ago.

Putting aside the rigmarole of the Wall Street earnings game for a moment, it's worth pointing out that those numbers are impressive by any reasonable standard (although not, seemingly, impressive enough by the standard of Amazon's valuation): revenue rose 23% year on year, while EPS shot up 27%.

Perhaps it's the company's guidance for the quarter in progress that has investors spooked. The revenue range of $18.1 billion to $19.8 billion is approximately in line with analysts' forecasts of $19.03 billion; however, Amazon expects an operating loss of between $55 million and $455 million (no, the $455 million is not a typo; yes, it's a wide range). Even once you back out the $455 million for stock-based compensation and amortization of intangibles the company is assuming, that gets us to an operating profit range of zero to $55 million. That doesn't get us anywhere near the $0.24 per share analysts were seeking.

As I alluded to above, the main criterion by which yesterday's report was disappointing, as far as long-term investors are concerned, is the share valuation itself. At 132 times next 12 months' earnings-per-share estimate, it takes a certain amount of faith to make a long-term bet on Amazon, a faith that is easily dented by a negative earnings surprise (or even the prospect of one). Still, Amazon isn't slowing down when it comes to ambition and creativity; as such, I think growth investors should consider continuing to give Jeff Bezos the benefit of the doubt.

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Comments from our Foolish Readers

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  • Report this Comment On April 25, 2014, at 10:50 AM, melegross wrote:

    Amazons stock is at ten times its worth. I'm amazed at how easily investors are led about by the nose by Bezos. They will never understand that the massive profits he keeps promising for the future will never materialize.

    I'm looking forward to seeing the bottom of the stock drop out.

  • Report this Comment On April 25, 2014, at 11:35 AM, Mathman6577 wrote:

    Value investors should avoid AMZN like a plague.

  • Report this Comment On April 25, 2014, at 2:22 PM, randallw wrote:

    To even consider buying AMZN at this price, you would have to believe that the company will eventually double earnings....and then double earnings again.....and then again......and again.....and, again. Madness.

  • Report this Comment On April 27, 2014, at 12:28 PM, marc5477 wrote:

    Talk about no objectivity at all in the comments... you guys are never going to make much with your abilities. Bottom line is that Amazon has been experimenting for nearly 3 years now and this has hurt their bottom line and has distorted their real earning. Do any of you doubt that they can return to 4%+ margin if they wanted to? I dont doubt it in a second because it is very easy to return to conservative operation and cut expenses. Realistically, Amazon can get more 4% without breaking a sweat and even given a decrease in revenue from cost cutting their real EPS minus experimentation is above $5.50. That means their real P/E is actually in the 50 which is still a bit high for me but it does put them in line with how fast their revenue has grown.

    I dont own any Amazon stock but the fact is that if they can sustain this type of revenue growth and then convert it back to even paltry 4% margins (never mind the years when they saw over 6%) then this has incredible potential. There is still a lot of room for revenue growth in here and cost cutting is easy since they are not brick and mortar. That said I understand the frustration but I also understand what Bezos is trying to do. If you dont get in on these sectors now (streaming, gaming, tech) then you can pretty much assume you will never get in on them. Right now they are positioned to do a lot of damage to netflix and although that is not a huge revenue bringing it does convey much higher margins and it is growing. I can understand both sides but the comments above dont make sense unless they are just trolling.

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