Amazon’s Stock May Drop Further Despite Big Earnings Beat

Amazon.com Inc. (AMZN)  reported blow-out third quarter results on October 29, easily beating analysts’ expectations. But it may be a disappointment on Amazon’s Web Services business that turned the stock lower by almost 2% in the after-hours session.

The equity has had a tremendous move in 2020. However, the stock isn’t cheap, with the shares trading at its highest valuation in years. The technical chart wasn’t in great shape heading into results either.

AWS

According to data from Refinitiv, analysts were looking for third quarter AWS revenue in a range of $11.2 billion to $11.9 billion, or $11.57 billion at the mid-point. Revenue did come in better than the mid-point of the range at $11.6 billion. Still, it is likely the disappointment that AWS didn’t come above the high end, which turned the shares lower. Additionally, AWS had revenue growth for its second quarter in a row below 30%, coming in at 29%.

While the miss appears minor on the surface, AWS is the high margin part of Amazon’s business. It accounts for the majority of Amazon’s operating income. In the third quarter, Amazon had a total operating income of roughly $6.2 billion; AWS represented 57% of that operating income, or approximately $3.5 billion.

Guidance

Additionally,  the company is guiding operating income in a range of $1 billion to $4.5 billion, or $2.7 billion at the mid-point.  That is lower than the operating income of about $3.9 billion a year ago, a drop of over 29%.

The operating income decline is surprising since the company is guiding revenue to a range of $112 billion to $121 billion, or $116.5 billion at the mid-point, growth of about 33%. That is much better than analysts’ estimates for $112.3 billion. Still, the strong topline growth and declining operating income indicate the company is likely to be spending a lot.

Weak Technicals

Meanwhile, the chart has a bearish take to it with the potential for a double top reversal pattern marked by the two peaks around a price of $3,250. It could even trigger a very sharp decline in the shares to potentially as low as $2,465.  For that pattern to work, the stock would first need to drop below a technical support level of around $2,900.  Additionally, the relative strength index also suggests lower prices lie ahead because it has been trending lower, indicating the momentum is leaving the stock.

The stock isn’t cheap, currently trading at a price to sales multiple at the upper end of its 20-year range. This means that investors may continue to be super critical of the smallest issue that comes up down the road.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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