Suppose you are planning a picnic and the forecast is for sunny weather and unfortunately, the day turns out cloudy. Chances are you will most likely be disappointed. However, suppose you are planning a picnic and the forecast is for rainy weather and the day turns out cloudy. Chances are you will most likely be happy. The moral of this example is that some things in life are all about expectations.
Becoming a successful investor demands the recognition that expectations as compared to the actual data frequently drive investor response. Market watchers witness this almost daily regarding the release of economic data as well as corporate earnings reports. It is not only the actual number that is evaluated, but that number relative to the consensus estimate that drives the underlying security or in the case of economic data the direction of the stock and/or bond market. An additional contributing factor might be commentary from the issuer surrounding the data or as it pertains to quarterly earnings reports, the conference call.
Amazon’s latest quarterly earnings report is a good case in point. The online retailer posted quarterly earnings of $15.12 per share this past Thursday, far surpassing the consensus estimate of $12.30 per share and well above the $10.30 and $5.22 per share Amazon earned during the matching quarters during 2020 and 2019, respectively. Although the numbers seemed impressive enough, investors focused on the fact that despite a rise in revenue to $113.08 billion, an increase of 27.18% and 78.35% over the past one and two years, respectively, it nonetheless fell short of the consensus estimate which was for $115.2 billion.
As of this writing, the share price of Amazon has fallen nearly seven percent. Clearly, no picnic!
In our opinion, there were additional factors that also drove the share price lower, not the least of which was the stepping down of former founder and Chief Executive Officer, Jeff Bezos, on July 5. Bezos ceded the reins to the company’s top cloud computing executive, Andy Jassy. Although time will tell, Amazon and Bezos have had a history of lowering the bar when discussing the future of Amazon and what better time to do this than when a new CEO has recently taken the helm.
The task of lowering the bar this time fell to Chief Financial Officer Brian Olsavsky, who on the conference call stated that “we do expect this pattern of difficult year-over-year revenue comps to continue for the next few quarters.”
Although we would consider the miss on revenue mildly concerning, given the meteoric rise last year along with the opening of the U.S. economy, there was bound to be some redirection in how consumers were spending their savings along with their stimulus windfall. Furthermore, after a near doubling from the December 31, 2019 close, investors were looking for a reason to book some profits. Despite the slight shortfall in revenue, at this time we believe investors would be wise to focus on the longer term opportunity in Amazon as they continue to cement their grip in online retailing.
In addition and on a more positive note, Amazon Web Services reported that revenue rose 37% to $14.8 billion during their latest quarter.
In regard to Amazon as well as other companies, perhaps expectations had gotten too high. As we proceed through this fast-paced financial world, we believe that many times the investor that can be patient, focus on their objectives and take a deep breath will ultimately be rewarded.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.