What Amazon Earnings Miss Means For Tech

This is one investment idea where I can really speak from the heart. I was long Amazon (AMZN - Analyst Report) calls that were out of the money and they pretty much became worthless the day after earnings. Let’s take a look at the earnings miss and what it means for the broader technology market as well as some select retail stocks.

The Miss

Amazon reported revenues of $35.747B and that was below the Zacks Consensus Estimate of $35.9B. This marks the first time AMZN missed on the top line since the December 2014 quarter.

Earnings per share came in at $1.00 and what was $0.61 below the Zacks Consensus Estimate for a negative earnings surprise of 38%. This was the first miss on the bottom line since September 2014 quarter. In the session following that release, AMZN was down 8.26% and the stock is down a similar amount in trading today.

Recent History

As we look back over the last 7 quarters, we see the company posting earnings surprises of -38%, 270%, 226%, 7%, 87%, -30% and -107% respectively.

The revenue surprises have ranged from -1.7% to 3.9%, so a much tighter range.

The idea is clearly that aside from one quarter, AMZN either blows it out or they blow it up. At least when it comes to the degree by which they beat or miss the bottom line.

As far as stock price moves go, and let’s face, that is what we really all care about, it’s a mixed bag. The last four quarters were all gains, 7%, 8%, 14% and 16%. That streak will likely end today. The June 2014 quarter was a miss on top and bottom and the stock fell 9.5%, and following another miss on top and bottom, the stock fell 8% following the September 2014 release.

What Does This Mean For Tech?

When you think of AMZN, you may think retail, but there is a huge tech component as well. Amazon Web Services (AWS) has been a profit driver for the company over the last few quarters and saw revenue growth of 69% in the most recent quarter.

This service competes with Alaphabet (GOOGL - Analyst Report), VMware (VMW - Snapshot Report) and Microsoft (MSFT - Analyst Report) among others. GOOGL is a Zacks Rank #2 (Buy) while VMW and MSFT are both Zacks Rank #3 (Hold). MSFT posted strong earnings last night while GOOGL reports February 1. VMW reported this week and beat the Zacks Consensus Estimate by 2 cents, beat on the top line as well yet the stock was lower by nearly 9% in the session following the release.

The idea is that AMZN runs AWS in the same way they have been running their retail business. That means price cuts, frequent price cuts. While this is great for those that are buying the service, the price war really kills the stocks of the participants. Luckily for AMZN, GOOGL and MSFT, the cloud is only one aspect of their business.

A Retail Beat

There were plenty of calls for AMZN to beat expectations so it was somewhat surprising to see the top line miss. I know I saw AMZN packages on doorsteps when I came home from work and saw AMZN trucks in my neighborhood leading up to the holiday break while walking my dog.

It seemed like retail was left for dead with the sector struggling in the weeks leading up to Christmas. There was one report that stunned the market however. Under Armour (UA - Analyst Report) beat the Zacks Consensus Estimate by two cents, marking the third straight beat and extending its streak without a miss (just beats and meets) to 28 quarters. That is what I call earnings management!

UA posted solid revenue growth of 30%, up from 28% in the most recent quarter. The beat of $55M on the topline is the third straight quarter of topline beats that are growing in size. The previous four quarters saw beats of $31M, $22M and $4M respectively.

Going Forward

While the quarter was a disappointment for most investors, I believe AMZN will continue to grow and be an excellent long term investment. Competition has always been fierce in the tech space, so companies like MSFT and GOOGL are used to it by now. The real question is if surviving retail brands start to leverage the AMZN fulfillment services while maintaining pricing power.