By Jeff Macke
Amazon (AMZN) did it again. The world’s best merchant came into this quarter with substantial, aggressive shorts all seemingly betting a miss would send AMZN shares into a tailspin. The basic idea of shorting Amazon was that the stock was “overbought,” company margins are horrible, and the price to earnings ratio was effectively infinity.
If revenues and earnings came in light, Amazon’s stock would plunge, and the bears would finally at long last take down one of their white whales.
To their considerable chagrin, the bears got their earnings miss but the stock didn’t do what it “should.” After a brief drop, Amazon shares quickly roared to all-time highs after hours, a reversal of more than 10% in less than 10 minutes.
Here’s what Bears don’t understand about analyzing Amazon:
Jeff Bezos is the best living CEO of his generation. He started with an online bookstore and built the best customer experience in mass merchant retail. In the words of Jack Welch, Bezos is a leader able to “see around corners” and know what’s coming next.
After nearly 20 years, the Street has learned to take his word for it on strategic direction. That buys Amazon a lot of slack when it comes to margins and EPS on any given quarter.
P/E and Cash on Hand Are Overrated
Amazon is spending billions on where their business is going as opposed to what it is today. Is sales tax a problem? Amazon is answering with 20 warehouses outside major metropolitan areas to experiment with same day shipping. Can iTunes and Netflix (NFLX) obviate a seller of content like Amazon? The company now has 23 million titles available for instant viewing.
For a growth company, cash is to be spent. Between them, Microsoft (MSFT), Intel (INTC) and Cisco (CSCO) have well more than $150b and stocks that haven’t budged in a decade. Another way to look at it, the companies are akin to the multimillionaires who live under a bridge.
Amazon has more than $11b in cash and investments and a stock at all time highs. That’s not a coincidence.
Amazon is the Roman Empire of eTail
Amazon is now killing former competitors without even trying. It’s simply a function of what they do. It’s also why there was a 30% increase in Amazon sales from third party vendors. Those sales have higher margins than the goods Amazon itself stocks.
Would be competitors are choosing instead to just roll over and give Amazon a chunk of their profits. It’s as though they’re surrendering before they even get attacked.
Too Many Angry Shorts
In 25 years of investing and punditry I’ve seldom seen arrogance and flat-out anger like that ahead of last night’s call. The shorts had their thesis. When the stock didn’t fall, they had two choices: buy the stock back at any price or yell about the stupidity of the market even as it destroyed them.
Regardless of what you think of any of the above, know this: Passion about stocks always ends up losing investors money. Always.