Amazon (AMZN) shorts are being taken to the woodshed this morning. I haven't been short the stock, but I've certainly felt bearish about the name for the past four or five months.
Here's where I -- and other Amazon bears -- have been wrong:
- After a couple of quarters of misses, analysts had sufficiently low expectations for this quarter.
- Operating margins -- although only 1.5% -- were ahead of expectations.
- People don't care about earnings year over year. They only care about how you did relative to expectations (assuming your guidance is healthy).
Amazon shorts also have to contend with the market's inherent desire to believe in Jeff Bezos in the long term. Any decline in earnings is seen as a short-term pause in the purpose of the long term. So lower earnings are simply the result of investment in more people, robots, distribution centers and free shipping to hook investors.
You can say it shouldn't be this way, or you can accept the world as it is and make your way through it.
People said last night the rally was fueled by shorts covering. That could be. There were 10 million shares held short going into last night's print. About 1 million shares traded this morning before the open. Typically, 5 million shares trade in a given day.
Amazon posted 28 cents in EPS last night; the Street was expecting 7 cents. In the year-ago quarter, the company did 44 cents of EPS. However, of this 28 cents, 19.5 cents (or $89 million), came from equity method investment activity.
An interesting point of comparison: Amazon's North American Media Revenues (including all books, DVDs and music) was $2.1 billion in the quarter, up 17% year over year. All of Apple's (AAPL) iTunes revenues amounted to $1.9 billion in the quarter and grew 35% year over year.
The bears can point to the drop in earnings and free cash flow over the past three years, but it hasn't mattered to the stock. Investors have been willing to give Bezos the benefit of the doubt because he's delivered big growth in the past when he's said he's investing in the business.
So, this stock no longer works when there are meaningful cracks in the revenue story. When might that be?
Analysts are expecting $63 billion in revenues for this year. They also see it rising to $80.8 billion next year. That's a 28.4% year-over-year growth rate in the top line. In this current quarter, Amazon grew total top-line sales by 33% compared to the prior year, so management's lofty goal seems doable on the surface. However, it could be close. Top-line growth has been slowing over time; we'll see what it is by next year.
Top-line sales growth decelerated by 10.5% this quarter compared to the first quarter of 2011, from 38% to 34%. If that decline continues at the same pace -- a supposition that seems ambitious, as I'd expect it to be increasing its deceleration rate over time -- sales growth would be at 30.2% by the end of Q1 next year and 27% by Q1 of 2014.
To me, it looks like the cracks in the top-line Amazon growth story could start to show by Q3 or Q4 of this year.