It has been a bad week for two of the stock market's most well-known high-growth companies, in large part as execs are making it very clear to investors that in order to grow in the future, investments have to be made in the present.
Under Armour (UA) shares got slaughtered this week, prompting founder and CEO Kevin Plank to give one of the more interesting CEO interviews on TV in recent memory. It was as if Plank forgot the cameras were rolling, going into a fierce -- seemingly unscripted -- defense of Under Armour. Indeed it was great theater, and probably somewhat reassuring if one was a long-term investor (but probably not a trader who was long into the quarter, and continues to hold on for hope of a short-term bounce, as Plank was steadfast in the company needing to invest today).
Then we got Amazon's (AMZN) third-quarter mini-bombshell on Thursday evening. After a year of being in Wall Street's good graces, Amazon shares were crushed in after-hours trading after a hardcore earnings miss. The results weren't even close to estimates, and the fourth-quarter revenue outlook was lacking. Like Under Armour, Amazon's investment spending caught the ire of Wall Street. (Under Armour and Amazon are part of TheStreet's Growth Seeker portfolio.)
But why should it be any surprise at all? The company is hiring more seasonal workers year over year, possibly developing a grocery store format, building out distribution centers and God only knows what else. Amazon will have these types of high-expense quarters as it strives to dominate the future of retailing. That doesn't mean that, like Under Armour, the company should be written off as an unfit long-term investment.
Quite the contrary: If anything, it should strengthen the bull case on the company. So many executives nowadays forget about the future to line their pockets in the present, usually by keeping expenses low and earmarking cash for buybacks. Those often lead to short-term share price pops, but it has been my experience that it's not how long-term value is created.
So as I wondered out loud on Under Armour after its tough-to-stomach earnings call, is Amazon some 6% cheaper than a day ago a once-in-a-lifetime opportunity? I don't see how that shouldn't be the view, especially after ingesting a week full of holiday plans by major retailers that have them giving more margin away to keep pace with Amazon. A couple of things that Amazon's third quarter should remind those newly formed worrywarts:
- The company was still profitable. That may sound silly, but Amazon delivering profits when it decided to up investment spending hasn't often been the norm. This should give an investor confidence that prior investments are paying off, and so could ones currently being made.
- International sales growth rates strengthened vs. a year ago in each product category.
- Free cash flow was up 59% year over year. In other words, Amazon is still showing some of the spending discipline that earned Wall Street's praise this year.
- Operating margins are on an uptrend in Amazon's Web Services, no small achievement given the competition from the likes of Microsoft (MSFT) and others.
- North America operating margins were up nicely, too.
- Perhaps another silly mention, but where else in the consumer space can you find Amazon-type growth? Nowhere, and that's a direct result of Amazon's business model that is inflicting pain on basically everyone.