- Institutional investors want to see EPS growth.
- AMZN is being forced to bring money to the bottom line with Prime.
- But Amazon Prime is an inferior service that needs work.
Amazon (NASDAQ:AMZN) is scheduled to release earnings on Thursday, and the street is expecting the company to earn $0.24 per share. Amazon's reputation is to deliver solid revenue but meager earnings, but beginning last quarter, the street wanted Amazon to deliver earnings as well.
With what some might construe as an effort to satisfy the institutional investors in his stock, Jeff Bezos brought some of that revenue to the bottom line, because in the last quarter of 2013, Amazon had larger EPS results than at any time in its recent history.
Historically, EPS growth has been flat (nil), and some investors were fine with that, but it seems as if the institutional investors in Amazon have finally begun to want more. That could pose some serious problems for shareholders, because it is not what Amazon ultimately wants to do.
Running a business that never makes any real money but continues to grow in size based on revenues alone is something that almost any moderately skilled executive could accomplish. It is bringing the revenues to the bottom line that separates the truly exceptional from the rest, and although Amazon's CEO was recently touted as one of the top executives on Wall Street, unless he is able to consistently bring earnings growth to the table going forward, that accolade will quickly be forgotten.
In addition, the company itself is floundering with its Amazon Prime subscription. Amazon Prime is simply not an attractive service, as that pertains directly to streaming video content. Netflix (NASDAQ:NFLX) far outpaces Amazon in its delivery and its infrastructure, and the only competitive advantage that Amazon has in offering Amazon Prime is its associated free delivery for Amazon purchased products. Were it not for that added value, Amazon Prime subscription rates would fall considerably.
The recent struggles Amazon has been facing publicly are only part of the problem. Internally, Amazon is trying to shift from a company who was not interested in making money to one that is being forced to make money. Anyone in the online sales industry recognizes that fulfillment is where the money is to be made, because margins are very tight, but if Amazon is relying on Amazon Prime to bring earnings to the table for those institutional investors, it will need to do something else to make that brand more attractive to people who use it every day.
The added value of Amazon Prime that exists today will deteriorate for people who also rely on Amazon Prime for streaming video content. Adding unique video content is obviously one option, and acquiring video content is another. The problem is, acquiring video content is extremely expensive, and if Netflix is an accurate reference, debt levels increase proportionally to earnings as new video content is acquired, so this also is an offset to shareholder value.
Ultimately, Amazon has hurdles in front of it, but the stock has also fallen aggressively already. In fact, according to our real-time trading report for Amazon, the stock has already tested longer-term support, and although the stock is still close to support, support has held thus far. If longer-term support continues to hold, our combined analysis for Amazon tells us to expect a progression towards longer-term resistance again, but support also acts as our risk control. If longer-term support breaks in Amazon instead, we should prepare for another aggressive move down (this is a condition based on the stock's ability or inability to hold support).
The risks are already there, and if the technical support level we have defined also breaks, it will be a sell signal and possibly even a short signal as well. For now, support has held, it is holding, and if that continues, positive signs will prevail.