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Amazon Shares Down on Disappointing Forecast

Oct 24,2014  Company News  Comment: 0

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Philadelphia, Pennsylvania – (StockNewsDesk) – 10/24/2014 — Amazon.com, the e-commerce giant, reported a net loss of $437 million in the third quarter on revenue of $20.58 billion in the third quarter. Both figures were below expectations. More troubling, the company’s revenue growth has begun to slow. After hours, Amazon’s stock price was down nearly 10%.

Bezos Losing Wall Street

For many years, Amazon’s stock price has moved higher, despite a lack of profits, as it focused on delivering sales growth of over 20% on a year over year basis. As long as Amazon demonstrated top level growth, Wall Street was placated. CEO Jeffrey Bezos’ intention was clear – win market share with superior customer service and competitive prices.

This plan has led Amazon to engage in cutthroat battles with competitors even at the cost of losing money. The patience of Amazon’s shareholders allowed Bezos to pursue such a strategy. However, in recent quarters, shareholders’ patience with Amazon has begun to wear thin. There have been noticeable missteps, such as the Amazon phone and tablet division, in general, which has failed to gain traction.

Now, while Amazon has failed to pivot to profitability, it has begun to lose its most appealing characteristic of growth minded investors, as the company’s rate of growth slows. As long as Amazon consistently grew revenue, Wall Street was willing to give Bezos the benefit of the doubt, even with significant capital invested in projects that failed to contribute to the bottom line.

Amazon Shares Down on Disappointing Forecast

CEO Jeffrey Bezos

Weak Guidance Hurts Stock Price

Shareholders were most shaken by the weak guidance for the holiday season. Amazon projected sales between $27.8 and $30.3 billion for the fourth quarter, which was below most consensus estimates of $30.9 billion. Overseas sales were less than expected in the third quarter and set to under perform in the fourth quarter as well, based on strength in the dollar and economic weakness abroad in markets such as Japan and Asia.

Given Amazon’s lofty valuation, if the company cannot deliver on growth, then it must begin expanding profit margins by cutting costs. So far, Amazon has shown no particular ability to do so in its history. Further, the type of investors who would buy Amazon in hopes of such a restructuring would only consider doing so at much lower prices. The shareholder base of Amazon, currently, owns due to Amazon’s revenue growth.

This could create a particularly brutal turnover in Amazon’s shareholder base, as was seen between 2012 and 2013 in Apple’s shareholder base, when the company went from a high beta, momentum stock to a dividend-paying value stock with share buy backs. Already Amazon’s stock has been under distribution; it topped at $408 at the start of the year. Since then, it has made lower highs even as tech stocks and the broader markets have been making higher highs. This under-performance is a troubling sign for a stock that has been a market leader in much of this bull market.

After hours, the stock was down to $280. This is a six-month low for the stock price, while many of its competitors such as Apple and Microsoft trade at new, all-time highs. Even worse, Amazon is now 31% off its all-time and 52-week high, putting the stock firmly in bear market territory. The stock is in a bad place of its slowing growth, scaring off growth investors and high multiples repelling value investors. Going forward, the company will need to show either top or bottom line improvement for it to regain lost ground versus its competitors.

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