Amazon Tanks, But Don't Expect it to Continue

Jacob Harper |

Perhaps no company has perplexed fundamental investors for as long as Amazon Inc. (AMZN). While few can argue that company is a mega-force that is impossible to ignore, with revenues approaching $20 billion a quarter, the company almost never reports much in the way of profits. Profits that will at some point, at least in theory, be shared with stockholders.

How long can a company’s stock rise without comparable earnings? The glib, yet correct answer had always been “pretty much forever.” As long as the money was being reinvested, and the revenues kept climbing, it appeared that notions that a company’s P/E must eventually shrink were antiquated throwbacks to a simpler, quainter era of investing.

Ah, but how the psychology of a bubble can reinforce the idea that this asset is truly a new paradigm, immune to the necessities of the market. Case in point: Amazon’s latest earnings report, which saw CEO Jeff Bezos reiterate his intentions to continue the company's famous/infamous and profligate spending.

So is this what caused the day’s sell-off? The final deflation of the bubble? Or was it a dip in revenue growth?

Equities.com’s Nicholas Bhandari thinks not, offering a fourth alterative: it's just a panic in an otherwise sound stock. That is, Amazon, despite its spending habits, is perfectly fine and there's not a bubble at all. Bhandari said, “Looking at the financials, nothing has changed. Frankly the rate of growth has never been consistent, with the obvious exception of 2009. But revenue growth has still always been very positive. I don’t think a change in revenue growth is the reason for the dip.”

Bhandari went on to pinpoint an aggressive sell-off caused by panic or a lack of faith in Bezos’ vision. But it’s not a panic that will be sustained. “They have a very new, aggressive strategy. It’s just a question of whether you buy into the plan or not. I think this (sell-off) is just people taking profits. Amazon is still up on the year.”

And in his opinion, things will go back to the old ways once again. That is, the old ways of Amazon continuing to see massive stock growth, profits be damned: “I expect it to recover almost immediately. I see zero red flags, and no fundamental changes in the stock.”

By 3 PM EST Amazon was 9.09 percent to hit $306.52 a share.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
AMZN Amazon.com Inc. 768.66 1.33 0.17 2,470,923
KAST Kasten Inc 0.85 0.07 8.97 4,683

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