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 The company that for years enthralled investors with improbable
growth and earned one of the technology sector's highest valuations
drew widespread ire after a spectacular results letdown on Thursday.
Amazon missed expectations across the board - on margins, on its net
loss and on revenue. An unaccountably poor 7 to 18 percent revenue
growth forecast for the typically strongest holiday quarter was the
final straw for some.
Coming just three months after a big letdown in July, the warning
may represent a tipping point for investors who are already wary of
a triple-digit price-earnings ratio and a persistent unwillingness
to throttle back spending.
"They're becoming much too distracted in all these other efforts"
outside core businesses like online retailing and web services, said
Matthew Benkendorf, portfolio manager at Vontobel Asset Management.
Benkendorf unloaded his Amazon holdings a year ago and said he would
be skeptical of future involvement even if the stock falls further.
"They are their own worst enemy to success," he said. "They really
need to do some soul searching and get focused."
After some rough patches following the dotcom boom, CEO Jeff Bezos
for years weaved a spell over Wall Street, riding a track record for
upending the retail industry with Amazon's low-cost, speedy-delivery
model. But Bezos has increasingly sought leading positions in
Internet computing, digital media, and on-demand services.
Investors have given Bezos a lot of leeway based on past success,
including the introduction of Amazon Web Services. The cloud-hosting
and computing service started out as a low-cost option for
cash-strapped startups but now vies successfully with IBM <IBM.N> on
government and corporate IT contracts.
But the company is entering a phase when many investors are
expecting to see profit improvements, said Andrew Cupps, president
of Cupps Capital Management in Chicago. Cupps now owns about 20,000
Amazon shares, down from around 30,000 earlier this year.
Amazon shares fell 8.3 percent on Friday to a year's low of $287.06,
wiping out more than $12 billion in value.
Including Friday's plunge, Amazon's stock is down by nearly a third
since January. Investors had begun questioning Bezos' growing
spending on perceived side-projects since his company missed
second-quarter profit targets.
Such long-term endeavors included Hollywood-style content and mobile
devices to compete with Apple Inc <AAPL.O> and Google Inc <GOOGL.O>.
But while Amazon's original drama series "Transparent" has won rave
reviews, the jury is still out on whether the company can
consistently deliver Netflix-style hits like "House of Cards."
Meanwhile, its "Fire" smartphone project appears in trouble. The
company took a $170 million writedown in the third quarter, largely
because of unsold phones. And last month, it slashed the phone's
price (with a two-year AT&T contract) to 99 cents from $199.
That's why brokerage analysts previously enamored of Amazon's
prospects struck a pessimistic note. At least 20 brokerages cut
their price targets on the stock on Friday.
"Even if Bezos is unconcerned about institutional investors' near
term, he needs to care how the stock impacts his ability to attract
and retain talent, particularly given the broadening tech expertise
he needs," said Macquarie's Ben Schacter. "If the stock continues to
get hit, we could even end up in a situation with activists calling
for significant changes."
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SICK OF IT
To be sure, short interest in Amazon remains low compared with most
companies, suggesting that few investors deem the company to be in
trouble. But it has increased over the past six months. About a year
ago, 0.3 percent of the shares available for short bets were being
used for such activity.
That's increased to about 1.6 percent as of Thursday, according to
Markit, which tracks share lending.
And despite Friday's steep target-price cuts, no brokerage yet has a
sell rating on the stock. Of the 44 analysts covering Amazon, 28
have a 'buy' or higher rating on the stock, though that's down from
32 three months ago.
Some still give Bezos the benefit of the doubt.
"I get it that people are frustrated that they've done a lot of
different things that haven't helped them that much," said Daniel
Morgan, senior portfolio manager at Synovus Trust Company, which
will hold onto Amazon for now. "We'll hang in there a little longer
to see if this thing will come to fruition for them."
Others have begun to waver. During Thursday's earnings call,
analysts pressed Amazon on when it would see a payoff from heavy
investments in China, devices and other areas. Wolfe Research
analyst Aram Rubinson asked what metrics Amazon tracks "because it's
a little hard to see any of it making positive progress."
"We are at the point where they're getting sick of it," said John
Thompson, chief executive of Vilas Capital Management, who has been
shorting Amazon for about two years. He took issue in particular
with executives' assertions that they rely on cash flows as one of
their prime performance metrics.
"They're using a cash conversion cycle – meaning, they take your
money in today when you buy something, but they don't pay their
supplier for 75 days. That is what creates cash flow and that's what
everyone on the Street looks at," he said. "That's an entirely
fallacious way of valuing a company."
"If Amazon were to exit China and use the savings to buy back stock,
we could easily get far more optimistic," Rubinson said in a
separate note. "But we are not holding our breath."
(Additional reporting by Lauren LaCapra and David Gaffen in New
York. Writing by Edwin Chan. Editing by Christian Plumb and John
Pickering)
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