Latest News: Technology |  Celebrity |  Movies |  Apple |  Cars |  Business |  Sports |  TV Shows |  Geek

Trending

Filed under: News | Technology News

 

Is Amazon Stock A Falling Knife?

Jan 31 2014, 9:03pm CST | by

11 Updates
Is Amazon Stock A Falling Knife?
 
 

YouTube Videos Comments

Recommend Your Tweet as Top Tweet:

Full Story

Is Amazon Stock A Falling Knife?

Amazon missed its numbers and its stock fell about 7% in January 31 early trading. But it looks to me like that drop is a buying opportunity. Especially since the miss has spurred Amazon to begin what investors have long expected — the use of its market power to raise prices.

There is much mystery in what makes investors buy or sell a security. One popular meme is that stocks go up if a company reports better than expected revenue and profit and raises its guidance.

And that approach is not a bad one to use in trying to understand why Amazon stock plunged. After all, analysts expected that Amazon would post revenue of $26.06 billion and earnings of 66 cents a share .

Amazon fell short on both counts. Its 20% revenue rise to $25.59 billion fell about $470 million short and its 21% spike in EPS to $0.51 was a whopping 15 cents a share short of what analysts expected to see.

How should an investor think about whether Amazon is under- or over-valued? Certainly its earnings growth of 21% falls far short of its ridiculously high price/earnings ratio of 627. And there is nothing I can imagine that would cause Amazon’s earnings growth at this point to accelerate to the point where such a high P/E ratio could be justified.

So why have investors driven its stock up 39% in the last year? I do not know.

But I would guess that investors are expecting that Amazon CEO Jeff Bezos will continue expanding into new product categories — applying a consistent strategy. Amazon has done an extraordinary job of adding to its corporate capabilities the ability to order, warehouse, pack and deliver real goods to consumers.

By providing a generally good consumer experience at a low price, Amazon has been taking market share from retailers of all sorts. And investors have probably been buying its stock because they are factoring in a change in Amazon’s strategy that they are wagering will boost the current value of its future cash flows.

More specifically, investors have long believed that Amazon would use its low prices to wipe out competitors in many product categories. And having vanquished those competitors, Amazon would be in a position to reap the rewards of its huge market share — by raising its prices with impunity.

The question for investors is whether such a price increase — should it come – would boost its stock price or lower it. After all, one of the most amazing things in the stock market is that people are willing to buy the shares of biotechnology companies that have virtually no revenue as they wind their way to possibly introducing their first product and generating revenue.

When a company has no revenues or profits, investors feel unleashed to dream big about how much the company could be worth if it ever was able to leap over all the hurdles needed to get a revenue-generating product.

But if the company does not generate as much money as investors expected, the stock could tumble.

An analogous argument could be made for Amazon stock. As long as it holds onto its strategy of very thin margins, investors can dream big about how much Amazon will make when it finally begins to raise prices.

And thanks to Amazon’s announcement that it may raise prices on its Amazon Prime shipping program, investors will get a look at just how much a price increase will boost Amazon’s bottom line.

As Amazon CFO, Thomas Szkutak, said, if Amazon does raise Prime’s price — the increase will be in the $20 to $40 range. According to Szkutak’s comment to the New York Times,  Amazon’s justification is rising costs. He noted, “Shipping costs have gone up a lot, fuel costs have gone up a lot.”

For Prime’s estimated 25 million subscribers, a $40 increase would boost Amazon’s revenues by $1 billion — cutting its $1 billion to $2 billion a year loss estimated by Sucharita Mulpuru , an analyst with Forrester Research.

I think Amazon is just at the beginning of testing price increases. And if this one happens and does not result in a loss of subscribers, I would guess Amazon will try raising prices more.

This makes me think that the ongoing macroeconomic turmoil in the markets will drive down Amazon’s stock to the point where there will be an attractive long-term entry point.

Source: Forbes

 

You Might Also Like

Updates


Sponsored Update

Update: 11

SZA - Julia

Source: Oh No They Didn't!

Alabama v Arkansas
Produced by Felix SnowDirected by Rodney PasséSource My fav track off the EP, glad it got a visual. Get into this ethereal knock if you haven't already ...
Source: Oh No They Didn't!   Full article at: Oh No They Didn't! 20 minutes ago
 


Advertisement


Update: 10

Ramdin guides Warriors to victory

Source: Sport Balla

A person (L) looking to work within the
St. George's (Grenada), July 12 (IANS/CMC) Captain Denesh Ramdin struck a Man-of-the-match half-century, but Guyana Amazon Warriors had to overcome late i ...
Source: Sport Balla   Full article at: Sport Balla 1 hour ago
 

More From the Web

Update: 9

Amazon asks FAA for permission to fly drones

Source: Pittsburgh Entertainment

Amazon Unveils Its First Smartphone
Amazon is asking the Federal Aviation Administration for permission to use drones as part of its plan to deliver packages to cu ...
Source: Pittsburgh Entertainment   Full article at: Pittsburgh Entertainment 2 hours ago
 

Update: 7

Where to Get Your French Food Fix on Bastille Day

Source: Michigan Avenue Magazine

PEN/Hemingway Awards Ceremony
Take a gastronomic journey to the City of Lights—without leaving your neighborhood. These French restaurants will transport your taste buds to France for the national holiday (July 14). Classic steak frites with New York strip steak Wine bar and restaurant Bistronomic is celebrating Bastille Day all weekend—from Saturday through the Monday holiday—with exclusive prices on its New York strip steak, doused in red wine reduction and served with frites tossed with truffle oil, and bott ...
Source: Michigan Avenue Magazine   Full article at: Michigan Avenue Magazine 2 hours ago
 

Update: 6

Cavaliers Season Tickets Reportedly Sell out Following LeBron James' Return

Source: Bleacher Report

The Cleveland Cavaliers are already feeling the effect of LeBron James. Just hours after the four-time MVP announced he would sign with the Cavaliers in free agency, the organization sold out of season tickets, according to ESPN's Darren Rovell: A Cavaliers source confirmed to ESPN.com that the team capped season-ticket sales at slightly more than 12,000 tickets Friday, leaving roughly 8,000 tickets per game to be used for group sales and ticket plans. [...] Prior to Friday, fans who ...
Source: Bleacher Report  Full article at: Bleacher Report 4 hours ago
 

Update: 5

Why Amazon.com and Lorillard Soared Today

Source: Fool.com

Tobacco Giant Reynolds American In Talks To Purchase Lorillard, Maker Of Newport Cigarettes
The blue chips finished slightly higher on no major news while Amazon and Lorillard were among the day ...
Source: Fool.com   Full article at: Fool.com 4 hours ago
 

Update: 4

Anthony Lopopolo: What really happened at the World Cup

Source: Canada.com

The World Cup began with fears of a subway strike in Sao Paulo, with unfinished stadiums and with a sense that huge protests were boiling beneath the surface. The outlook before the tournament was bleak. And yet several weeks after that opening match against Brazil and Croatia, things did not look so apocalyptic. Reporters went to fan fests and showed just how gregarious and charming the Brazilians are. Bad things did happen. People died at construction sites, foreigners were dep ...
Source: Canada.com   Full article at: Canada.com 5 hours ago
 

Update: 3

Amazon Seeks Permission to Test a Drone Delivery System

Source: New York Times Bits

France v United States
Amazon is getting serious about delivery by drones, and asked the F.A.A. for special permission to ...
Source: New York Times Bits   Full article at: New York Times Bits 5 hours ago
 

Update: 2

Android Circuit: Samsung Slows Down, Xiaomi Speeds Up, ART Is Faster, And Apps Arrive For Your Smartwatch

Source: Forbes Real Time

Samsung Celebrates Milk Music And ADD52
Taking a look back at the week in news across the Android world, this week’s Android Circuit highlights a number of stories, including Samsung showing signs of losing momentum, Xiaomi is onto a winner with a new tablet, ART is under the microscope, what treasures lie in 'L' for the users, why are app permissions back in the news, what is Amazon up to with the Fire, and what apps should be on your wrist ...
Source: Forbes Real Time   Full article at: Forbes Real Time 5 hours ago
 

Update: 1

Amazon’s in for a good fight with the FTC over in-app purchases

Source: BGR

Amazon Unveils Its First Smartphone
Apple recently acknowledged its in-app purchases issues that allowed children to purchase content without requiring verification and settled the FTC case agreeing to refund some $32 million in fraudulent in-app charges. But Amazon doesn't want to go down without a fight, GigaOm reports, as the same Commission is investigating its own in-app purchase problems related to the Amazon Appstore that’s available on Android devices. Continue reading... ...
Source: BGR   Full article at: BGR 5 hours ago
 

Shopping Deals

 
 
 

<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

Comments

blog comments powered by Disqus

Latest stories

Apple Updates HealthBook With Even More
Apple Updates HealthBook With Even More
The health tracking app has received another beta update
 
 
Preparations For Massive iPhone Sales Underway
Preparations For Massive iPhone Sales Underway
68 million phones have been ordered by Apple
 
 
Dave Grohl Promotes New HBO Documentary At TCA Press Tour
Dave Grohl Promotes New HBO Documentary At TCA Press Tour
At the summer press tour of the Television Critics Association (TCA) held in Beverly Hills, Foo Fighters frontman Dave Grohl sat down to talk about his upcoming HBO documentary which debuts on October. Speaking to a...
 
 
Analyst Ming-Chi Kuo&#039;s take on the Apple iWatch
Analyst Ming-Chi Kuo's take on the Apple iWatch
Apple’s sapphire-covered ‘iWatch’ to enter mass production in November