Amazon shares took a nosedive in after-hours trades and during regular trading hours today as the company posted earnings results that were much worse than expected. The stock plunged by as much as 9.28% to $576.36 per share, although shares were still tumbling as of this writing. Meanwhile analysts are coming out en masse in support of Amazon, which earned at least one price target increase and at least two price target cuts.
Amazon’s earnings by the numbers
The company posted revenue of $35.7 billion, compared to management’s guidance of between $33.5 billion and $36.75 billion and consensus of $35.9 billion. Earnings were $1 per share, compared to the consensus estimate of $1.56. The reason for the large difference was because Amazon invested to meet the demands of its customers, thus impacting overall profitability.
Amazon Web Services revenue was $2.41 billion, which was about in line with estimates. The gross margin was 31.9%, missing estimates of around 33%. Barclays and Bank of America Merrill Lynch analysts believe the margin miss was the main downward driver of Amazon shares. The BAML team noted also that management didn’t provide any guidance into drivers of gross margins on the earnings call.
Amazon price target upped by Wells Fargo
Wells Fargo Senior Analyst Matt Nemer and his team called Amazon’s earnings report “solid” and “one of only a few bright spots in a tough retail environment.” However, they add that this was the first time in four quarters that the company’s non-GAAP operating income missed the high end of management’s guidance, which they think “deflates some hopeful optimism that a huge ‘profit check in’ period will last forever.”
Management guided for first quarter revenue of between $26.5 billion and $29 billion, which beat Nemer’s previous estimate and the consensus of $27.67 billion at the midpoint. Guidance for consolidated segment operating income was between $700 million and $1.3 billion, which was pretty weak compared to the consensus of $1.23 billion.
The Wells Fargo team raised their valuation range for Amazon from between $693 and $707 to between $718 and $732 per share.
Amazon price target cut by Barclays, Macquarie
Barclays analyst Paul Vogel actually cut his price target for the online retailer and cloud services provider from $850 to $800 per share, calling last night’s earnings results “good, not great.” He said that although Amazon’s results were about in line with the consensus estimates, they just weren’t good enough to please the bearish market.
“Our sense for Amazon, and large cap Internet in general, has been that numbers have to be very clean for stocks to work in the short term,” he wrote. “Given the strength in the names overall for the past 12 months, and given the increasingly nervous market, we believe anything less than excellent will be punished.”
He used Netflix as an example as its results were “very good but not great,” and its shares have tumble 13% since it reported. Also Facebook’s results were “excellent,” sending the social network’s stock skyrocketing.
Investors concerned about new investment cycle
Macquarie Research analyst Ben Schachter also cut his price target, bringing it down from $760 to $725 per share. He said the biggest concern investors had going into the earnings call was that Amazon plans to begin a fresh investment cycle this year and that the fear was confirmed on the call. He’s not worried about it though because he thinks the investments this time are being driven by demand, which he says is “a very good reason to invest.”
“Basically, what is clearly happening is that there is too much demand for AMZN’s products and services, particularly related to Prime customers and FBA [Fulfillment by Amazon] sellers,” he said. “This is a high-class problem to have, however it is a problem until solved.”
He noted that fulfillment costs climbed in the fourth quarter as Amazon’s variable costs rose as it met demand from both Prime customers and FBA sellers. He added that the company did what it had to do to meet the expectations of its customers even though it had a negative impact on profitability. Further, he said the investments will improve efficiencies in the long run.