Things went well for Amazon (AMZN) last year.
The bottom line perked up after years of excessive spending. Product wins arguably trumped product misses, for a change. All of those positives were wiped out in one shot, however, as Amazon delivered a subpar fourth quarter.
Amazon missed consensus earnings forecasts, sending the stock price down about 7.6% on Jan. 29. The stock was initially down as much as 11% after hours on Jan. 28 as investors also grappled with a lack of information from the always-secretive Amazon team. Since the earnings report, the stock has continued to lag the Nasdaq Composite. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Nevertheless, Amazon's shares stand to rebound in 2016 once the stench of a profit miss wears off. Here are five reasons why.
1. Apple (AAPL) remains an unknown. It's no small wonder that Amazon's stock rocked in 2015 while Apple's went down the drain. Money managers were looking for a more compelling story in big-cap tech, and found it with an Amazon beginning to deliver on many fronts. Apple had become a known quantity with a lack of sex appeal. In my view, that dynamic is still in play this year for two reasons. First, Amazon has proven it could dial back expenses to boost the profit line if need be. Couple that with continued momentum in key product areas (cloud, video, e-commerce) and Amazon is likely to fall back into favor with the same crowd that viewed it favorably last year. As for Apple, it's shaping up to be another year of upgrades to existing hit products rather than something life-changing. Hell, when Apple's billions of dollars in stock buybacks in 2015 can't boost the stock price, it's pretty telling as to the lack of enthusiasm to own the name.
2. Twitter (TWTR) is proving to be a limited platform. Also interesting is that Amazon's stock outperformed last year as Twitter shares were hammered. For all the debates happening right now on Twitter, the reality is this: Twitter is not living up to the potential for becoming an e-commerce company. Part of the allure of Twitter during its IPO roadshow was that it would eventually challenge Amazon by allowing people to buy merchandise in real time. Now, Twitter can't even get people to tweet let alone buy a pair of underwear from a Wal-Mart (WMT) promoted tweet. I think Amazon's stock has to get a second look on weakness based on Twitter showing it has fundamental limitations.
3. One big-time favorable fundamental trend. Did you catch a glimpse of those UPS (UPS) fourth-quarter results? U.S. domestic package revenue grew an impressive 2.6% year over year alongside a serious slowdown in the U.S. economy. UPS is boosting its capex a whopping 17% this year to enhance its network to better service e-commerce, most of the demand coming from key partner Amazon. Looking at Amazon's own fourth quarter (absent the comparison to Wall Street estimates), the global sales growth was strong despite cooling in emerging markets and U.S. industrial production. The message is clear: The rise of the on-demand economy is a very, very powerful force that is unlikely to be halted in its tracks barring a coordinated global recession. Amazon is leading the on-demand economy and in areas where it's not, it will likely acquire those companies that are leading (for example, Instacart). Deeper thought to ponder: for every Macy's (M) or Wal-Mart store that closes, that raises the potential for a sale on Amazon.
4. Amazon is still growing ... and wildly. Unlike other big-cap tech names that are splitting up their businesses to appease activists, or newer tech companies struggling to grow important metrics (ahem, Twitter), Amazon continues to grow strongly. Net sales rose 20% last year, while operating income improved to $1 billion from $178 million year over year. Free cash flow increased to $7.3 billion for the trailing 12 months, compared with $1.9 billion for the trailing 12 months ended Dec. 31, 2014. These are metrics that deserve to be held in higher regard in a market revaluing tech names for sluggish growth prospects or a stretch of tepid performance.
5. Not doing dumb things. I like that Amazon may be preparing to open 400 bookstores in the U.S. They will likely be much better laid out than a supersized Barnes & Noble store, opening up the chance of gaining share. It's good to see Amazon building a logistics network -- over time, it could help to reduce its costs. Amazon continuing to bolster its streaming content makes sense, too. All of this points to execs who understand what they should, and should not, be doing. That's a positive to be rewarded in the stock price -- who wants execs spending on pipedreams? On the other hand, tech is littered right now with companies trying to branch out into new products or services to no avail. Does Apple really need to be secretly building an automobile team? Ditto Google (GOOGL). It's those dreamers from inside the tech space that the market doesn't like right now ... reinforcing the bull case on Amazon. (Apple, Twitter and Google are part of TheStreet's Action Alerts PLUS portfolio.)
