The problem with companies that have high expectations backed into their stock is that if they miss the street's forecast by just a small margin, then they fall like a rock. That's what happened with Amazon (AMZN) after the closing bell on Thursday, when the company reported Q4 results. Interestingly enough, while the stock initially tanked, it covered most of the losses, only to tank again when the bell opened on Friday's session.
Just how bad did Amazon miss?
Revenue came in at $25.59 billion, missing expectations of $26.0 billion
EPS of $0.51, missing by a wide margin the street's expectation of $0.69
Revenue guidance for Q1 of $18.2-$19.9 billion, at the very low end of expectations
Guidance for Q1 Operating Income of ($200)-$200 million on expectations of $367.8 million.
In my opinion, when any stock misses EPS by a few pennies, it's no big deal, especially in Amazon's case, when the stock is priced at around $400.
It's not the first time Amazon missed off on EPS. It has done so many times before, but the market either ignored it or did not sell the stock off so much. This time the market took it real serious.
What I think spooked the market was the company's Q1 revenue guidance. Here's why. Let me show you the chart below.
AMZN Revenue (Quarterly) data by YCharts
What a great chart! It's no wonder the street is putting such a high value on Amazon. This company has been delivering revenue growth year after year after year. However, with the recent guidance the company gave, this chart might change over the next quarters and might level off a bit. And if that happens, then the street will probably rethink what it wants to pay for Amazon's stock. Why?
For the past 10 years, Q1 revenue has been almost equal to or higher than Q4 revenue of the previous year. This has happened for the past 10 years except for two times. In Q1 of 2009 revenue was slightly lower than Q4 of 2008 and recently, Q1 of 2013 was lower than Q4 revenue of 2012.
If you look at the above chart and project an imaginary line of the guidance the company provided, it will be less that the revenue the company recorded in Q4 of 2012. That's what spooked the street. In other words, the revenue acceleration curve might level off.
And if that happens, then everything changes for Amazon's valuation, because like I said in the beginning, when companies that have a lot of expectations baked into their stock miss guidance or street expectations, they fall and they fall big.
For the time being, however, I think the market will give Amazon the benefit of doubt. At least that's the feeling I get from the recent ratings changes to Amazon's stock. Just after the current quarter most analysts lowered their price target, but not by much.
1/31/2014 | S&P Equity Research | Downgrade | Hold -> Sell | |
1/31/2014 | Jefferies Group | Boost Price Target | $390.00 -> $450.00 | |
1/31/2014 | Raymond James | Lower Price Target | $446.00 -> $443.00 | |
1/31/2014 | UBS AG | Lower Price Target | Buy | $465.00 -> $450.00 |
1/31/2014 | Pacific Crest | Lower Price Target | $475.00 -> $460.00 | |
1/31/2014 | Goldman Sachs Group Inc. | Boost Price Target | $450.00 -> $460.00 | |
1/31/2014 | Deutsche Bank | Boost Price Target | $400.00 -> $475.00 | |
1/31/2014 | Citigroup Inc. | Lower Price Target | $457.00 -> $454.00 | |
1/31/2014 | Cantor Fitzgerald | Lower Price Target | $425.00 -> $415.00 | |
1/31/2014 | Benchmark Co. | Boost Price Target | Buy | $400.00 -> $500.00 |
1/31/2014 | Oppenheimer | Lower Price Target | Outperform | $500.00 -> $475.00 |
1/31/2014 | Stifel Nicolaus | Boost Price Target | Buy | $400.00 -> $440.00 |
1/31/2014 | B. Riley | Boost Price Target | Buy | $409.00 -> $425.00 |
1/31/2014 | CRT Capital | Lower Price Target | Buy | $430.00 -> $420.00 |
1/31/2014 | Cowen and Company | Boost Price Target | Positive | $423.00 -> $440.00 |
1/31/2014 | Susquehanna | Reiterated Rating | Positive | $500.00 -> $475.00 |
Source: http://ift.tt/1bg3mW8
For the most part price targets are still above the current price of Amazon's stock as per Friday, which is still hopeful and only S&P Equity Research rates the stock a sell.
However, if the company misses one more sequential street estimate, or if guidance from the company is such that the street starts modeling Amazon with lower revenue growth, Amazon's stock will be hit very hard.
Investors should keep this scenario in their minds, because it will make all the difference in the world if Amazon's stock gets modeled from analysts for lower growth ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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