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Source: ABS-CBNNews.com
Amazon is what worries me about the markets
Amazon (AMZN), the A in FANG was shaken Friday, while the company announced "disappointing" results. Shares fell by nearly $ 200, or more than 10% during the day, before closing down about 8%. The disturbing fact is that Amazon is now down 20% from its record high of $ 2,050, and the decline could worsen from here.
Amazon 1 year chart
Source: StockCharts.com
Another worrying factor is the fact that Amazon is not the only one to post lower than expected revenue or moderate growth relative to expectations. Big readers like Facebook (FB), Netflix (NFLX), Alphabet (GOOG) and others have all posted disappointing results in recent quarters. In fact, the FANG sector as a whole seems to be stumbling and it could cause the whole stock market to fall.
Amazon's report: far less than stellar this time
Amazon is still a stock of growth story. The company is trading at a nose that bleeds 95 times more than projected earnings estimates this year. Ironically, the company's EPS numbers are much less important than Amazon's revenue numbers and forecast. But unfortunately for shareholders, Amazon has not met expectations on both fronts.
- Revenues were $ 56.6 billion, with no estimates estimated at $ 57.1 billion.
- The turnover has increased 29% year on year, while the international business figure has increased only 13%.
- AWS revenue also fell to $ 6.68 billion from $ 6.71 billion.
- The EPS record is 5.75 USD against 3.14 USD.
Now the very bad news
The advanced guidance was atrocious. The company drove revenue and operating income in the fourth quarter substantially lower than expected by most analysts.
- Consensus estimates were $ 73.79 billion, and the company had only $ 66.5 to $ 72.5 billion.
- In addition, the company has forecast a much lower operating profit of only $ 2.1-3.6 billion, compared with $ 3.9 billion.
Thus, after quarters and quarters of higher than expected revenue and forecast estimates, the opposite begins to occur. So, is this a one-off problem or could Amazon's growth slow down?
I think this is the last case, growth is slowing down and Amazon is not the only one. In fact, all FANGs have experienced slower than expected growth in one form or another over the past two quarters. The problem is that Amazon is so valued that its current valuation may not support the stock with a slower growth rate, and the share price may collapse.
In the fourth quarter, the company achieved an annual growth rate of only 10 to 20 percent compared to the $ 60.5 billion delivered in the fourth quarter of 2017, which corresponds to growth of $ 66.5 to $ 72.5 billion. of dollars. could be less than 10%, one digit next quarter. Does this growth trajectory really justify a multiple of 95 P / E?
Valuation: too rich to be missing
Amazon is currently trading about 95 times the forecast for this year. The problem is that it is an extremely rich valuation, which requires Amazon almost flawless execution in terms of revenue growth.
Unfortunately, growth is slowing down. This year, sales growth is expected to be around 32%, up from 22% next year. However, next year's forecasts could be optimistic and, judging by the company's forecasts, growth is expected to be significantly lower next year.
In fact, the lowest estimates predict growth of only about 15% next year and, according to the fourth quarter forecast and other factors, I believe Amazon's growth will slow to around this level. The problem for Amazon is that at 95 times earnings and with revenue growth of only 15% and a slowdown, the company is extremely overvalued at the moment.
Did you think the good times would last forever?
Source: iBankCoin.com
Rates are rising, growth is slowing down, consumer spending will be impacted and Amazon is not immune to a more general market downturn. However, the stock has been a "can not hurt" Wall St. darling for years now. In addition, investors have been willing to pay just about the price to capture the growth provided by Amazon. Conversely, now that growth is slowing down considerably, the stock could be very shocking.
What is remarkable is that Amazon's stock price could be cut in half, but even with a stock of just $ 820, the company will still trade more than 47 times the projected EPS for 2018. Still largely overvalued by just about all traditional evaluation measures.
The challenge for the market: Amazon is not alone
It would be one thing if Amazon were alone in showing weaknesses in its growth story, as well as in the story of the exorbitant valuation. But not all FANG members have shown signs of a disappointing trend that has developed over the past two quarters.
F – Facebook: Reported an extremely discouraging quarter in July when user growth disappointed by 50%.
A – Amazon: We have just reported low income and much lower forecasts than expected afterwards.
N – Netflix: Disappointed by growth in the number of subscribers (by far the most important indicator of the company) in the second quarter of this year.
G – Google: Just a few days ago, Alphabet also disappointed in earnings, reporting only $ 33.7 billion, against an estimate of $ 34.04 billion.
The problem for the various high-growth / multi-strength stocks (and not just the FANGs) is that substantial growth must be maintained to justify their incredibly rich valuations. Now that growth appears to be slowing down, many in-flight stocks may be in serious decline.
This is also a serious problem for the entire stock market. FANG has been the leader who has led this rush to the bull market considerably higher in recent years. However, now that all FANGs are showing signs of slowing down, their stock prices could potentially drop significantly, and the broader stock market could also fall further. As the shares of the FANG on the rise, they could very easily lead them downward.
Terrible Look Graphics
Three of the four FANGs are already in the bear market, with the exception of the alphabet. In addition, all declines started well before the S & P 500 peak, which is even more troubling. This bear market of FANG seems to have started several months ago, and it also drives the market as a whole.
Amazon
Netflix
There could be a lot more pain coming
The bottom line is that Amazon's shortfall and declining forecasts are deeply troubling. This is the title that has undoubtedly been the most powerful leader in this bull market. Moreover, this is not an isolated case, as the company has both missed the estimates and has been much less guided. Therefore, this could be a developing trend and significantly lower growth is plausible for Amazon in the future.
In addition, it's not just Amazon, all the FANG and many other names with high / multiple ruffles show signs of slower growth. In fact, many high-growth names provide a comprehensive illustration of the signs of slower growth relative to expectations. The problem is that it comes up against the increase in GDP figures and the general story that the economy is doing well.
I do not think the economy is doing so well. I believe that GDP figures are a mirage provoked by tax and fiscal stimuli at the end of the cycle. Once their effects are exhausted, the economy could stagnate due to significantly higher interest rates, incredibly high debt levels and other factors holding back growth.
In fact, Amazon, FANGs and many other companies are already starting to show signs of tension and are likely to face new growth problems in the short and medium term. This makes Amazon's stock price seem significantly overvalued here. As a result, there could be much more trouble coming for Amazon, as well as for other high multi-stock stocks in general.
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Warning: This article expresses only my opinions, is produced for informational purposes only, and in no way constitutes a recommendation to buy or sell securities. The investment carries a significant risk of loss of capital. Please do your own research, consult a professional and review your investment decisions with the utmost care before jeopardizing your capital.
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Disclosure: I am / we have been GOOG, FB, NFLX for a long time.
I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
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