If Amazon were an ordinary company, investors would long ago have strapped its management to a rocket ship and sent it far, far away.
From "Amazon and Its Admirers Shrug Off Report of a Loss as Sales Keep Climbing", NY Times, October 26, 2012
By now, the resilience of Amazon.com (AMZN) should be legendary. AMZN is a company that generates large amounts of revenue and very little profit. Yet, the stock has staged an incredible comeback from the burst of the tech bubble which took the stock from triple digits to single digits in less than two years; last month, AMZN hit a fresh all-time closing high around $262. During the financial panic in 2008, AMZN "only" printed 2-year lows and while the NASDAQ (QQQ) crashed to six-year lows in 2009, AMZN was well into a complete recovery from 2008′s crash.
The resilient stock of Amazon.com
The chart below shows AMZN's near exponential growth in revenue on an annual basis through 2011. At the same time, net total earnings as a percentage of revenue hit a high in 2004 and have suffered ever since. As the New York Times stated: "What separates Amazon from the competition is that it is not trying to make money. It is instead trying to grow as fast as it can, something it has been doing successfully for 15 years."
Amazon.com Sales Vs. Total Net Income As A Percent of Sales (Net Margin)
Source: MSN Money Ten-Year Summary
The third quarter's net loss was Amazon's first in nine years but seems consistent with the annual trend in place since the recession. AMZN reported an operating loss of $28M and a total net loss of $274M. $169M of that loss was from a writedown related to its investment in LivingSocial. Back out the LivingSocial numbers and AMZN printed a total net income of -$105M or -$0.23 per diluted share.
The dichotomy between robust sales growth and anemic income produces an odd valuation for AMZN. While its price/sales ratio is a relatively reasonable 1.8, its price/earnings ratio is an eye-popping 2,836 on a 12-month trailing basis and 131 on a forward basis. Price/book is 13.4.
On top of the rare loss, AMZN guided down for Q4 revenue and operating income: $20.25-22.75B versus $22.85B consensus revenue estimate and operating income from -$490M to +$310M. In other words, the losses are very likely to continue in the fourth quarter. So, it was no surprise when AMZN's stock quickly dropped as much as 9% in after hours to print almost $200. However, as is so often the case with AMZN, this dip turned into an instant buying signal. Not only did AMZN spike higher to erase most of the after hours loss, but also the following day, AMZN closed UP an incredible 6.9%. This happened on a day where the NASDAQ (QQQ) was lucky to stay above its critical support at its 200-day moving average (DMA).
Amazon.com avoids a retest of its 200DMA with a strong post-earnings bounce
Since the beginning of this year, I have advocated a strategy of buying AMZN immediately at the open the day after reporting earnings. I know at the time it was hard for many people to believe, and I could hardly believe what the data told me. I even called an "audible" for buying a dip instead of the open after April earnings sent AMZN up 14% in the after hours. Yet, this trading rule has worked more consistently than ever in 2012. Buying the open this time around generated a 4.2% gain at the close. The trading rule also allows for holding the position for at least two weeks. However, I am warily eying growing weakness in the general market, so I doubt I will hold on for the full two weeks this time around.
Finally, I am updating the overall post-earnings analysis for AMZN. Below is a table demonstrating the returns from buying AMZN's open and closing after two (calendar) weeks. The stop-loss rule exits the trade after the stock closes below the low of the first post-earnings trading day. That table is followed by an update of the charts from each earnings cycle since 2009. In each case, AMZN reported earnings after the market closed. Each chart contains about 10 trading days before and after earnings.
Note that this strategy clearly has under-performed a buy-and-hold strategy on AMZN since 2009, especially a strategy that includes adding to holdings on a regular basis or after large corrections. However, this approach works for people like me that believe at some point AMZN's stock will hit a post-earnings brick wall and do not want to stay exposed to such a risk for extended periods of time. Using stock options instead of shares further enhances the upside potential of this strategy while providing an automatic stop loss (the total amount spent on the options).
Source: Price data from Yahoo!Finance
CHARTS FOR AMZN EARNINGS SINCE 2009
Source for charts: stockcharts.com
Be careful out there!