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Why Amazon Stock Crushed Earnings, Then Crashed 5.5%

By Rich Smith – Updated Oct 30, 2020 at 2:09PM

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Amazon beat earnings with a stick, then investors sold it. Was that a mistake?

What happened

This is not how earnings beats are supposed to work: On Thursday, Amazon (AMZN -8.43%) reported a staggering profit of $12.37 per share (Wall Street had predicted only $7.41) on sales of $96.1 billion that likewise beat street estimates of $92.7 billion. The e-commerce giant then followed up its massive earnings beat with a prediction that in the heavy-spending holiday fourth quarter, it would grow its sales past $112 billion and perhaps as high as $121 billion.  

Wall Street thinks Amazon will do only $112.3 billion in sales in the fourth quarter.

But despite all this, investors are selling off Amazon stock, which was down 5.5% as of 1:20 p.m. EDT on Friday.

Big red arrow going down over a stock chart

Image source: Getty Images.

So what

Compared with a year ago, the third quarter saw sales grow 37%, operating income grow 96%, and net income per diluted share surge 192%. About the only thing that might be "bad news" in the quarter is the fact that free cash flow declined from $3.2 billion a year ago to $901 million as Amazon invested heavily to deal with the influx of new business from consumers locked down during the pandemic.

And even in the realm of free cash flow (FCF), Amazon's results for the trailing 12 months showed FCF of $29.5 billion, up 26% from $23.5 billion a year ago.

Now what

So were investors right or wrong to sell off Amazon stock today? 

The stock was priced for perfection heading into third-quarter earnings. It performed perfectly, got sold off anyway, and still trades for a staggering 51.4 times trailing FCF. Even with management forecasting as much as 38% sales growth this coming quarter, and even with everything else going right for the company, I can't help but conclude that Amazon stock is no great bargain.

If I were a shareholder today, I think I'd be taking my 80% gains over the past year and selling my Amazon stock, too.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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