For the past week or so, Wall Street has been knee-deep in tech companies’ quarterly earnings reports.
Later today, it’s another perennial big mover’s turn – Amazon (AMZN).
The world’s largest online retailer reports after the closing bell.
If you hold Amazon shares, you should be aware that, on average, the stock rises or falls by 9% in the trading day immediately following the company’s quarterly earnings reports.
To put that into perspective, the average stock in the S&P 500 only moves about 1% on earnings reports.
But those are only the averages.
In the last quarter, for example, Amazon reported a rare (and surprise) profit. Shares jumped by 13%.
But this go-round, the stock could just as easily suffer a double-digit decline. Here’s why…
Still Buying Into the Promise?
For as long as I can remember, the market (i.e., investors) has valued Amazon’s stock on a shaky promise.
That is, after years of investing billions of dollars in growth initiatives, we’re told that one day, Amazon’s management will stop doing so.
And when they do, we’re told that it will unleash a torrent of profits.
Based on Amazon’s stock performance, investors clearly have no problem embracing this promise.
One might argue that this is the finest representation of the greater fool theory at work.
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The fact that so many investors keep buying into the potential for future corporate profits is actually generating investing profits today.
But here’s the problem…
As Amazon’s sales grow bigger and bigger, it gets increasingly difficult – and eventually impossible – for the company to keep delivering chart-topping revenue growth.
At some point, growth is going to slow enough that shareholders won’t stand for a lack of profits anymore. They’ll demand it… or they’ll head for the exits.
So where’s that magical threshold?
Anyone who tells you that they know is lying. So I won’t!
But management had better know.
Because we’re definitely moving towards it, not away from it.
Slower and Lower?
Based on the latest analyst estimates, Amazon is set to report its slowest quarterly revenue growth in two years.
The consensus call is for sales of $22.4 billion, according to FactSet data – a 13.6% growth rate.
On the face of it, that doesn’t sound bad. But compared to the 22.8% revenue growth chalked up in Q1 2014, it’s a sizeable drop.
Remember, though, analyst estimates are just that – estimates. Actual results may vary. And they often do.
But in this case, Amazon has already telegraphed that sales growth could check in even lower.
The company provided first-quarter sales guidance of $20.9 billion to $22.9 billion.
At the low end of the range, we’re talking about a measly 6% growth rate.
If that’s the reality… look out below tomorrow.
That is, unless Amazon can get investors to focus their attention on growth elsewhere…
Total (Cloud) Domination
In the event of unexpectedly slower top-line growth, Amazon’s cloud-computing business, Amazon Web Services (AWS), could prove to be the saving grace.
Amazon claims to have over one million AWS customers, with usage reportedly soaring at approximately 90% year over year.
There’s no doubt that Amazon is the hands-down leader in this fast-growing space, too, garnering an estimated 28% market share. The closest competitor is Microsoft (MSFT), way down the ladder at 10%.
And we’re still early in the AWS growth cycle, too.
Consider: Sanford Bernstein Analyst, Carlos Kirjner, expects AWS to generate $20 billion in annual revenue for Amazon. That’s up from an estimated $4.5 billion in 2014.
The reason I say it’s “estimated” is because Amazon has historically rolled up AWS revenue in its “North America – Other” segment in financial reports. So we can’t be 100% sure about the size of the business until Amazon breaks out its AWS results.
And we won’t have to wait long. Starting today, Amazon is going to do just that.
Coincidence? I doubt it.
CEO Jeff Bezos and Co. are smart enough to understand the need to redirect investors’ attention away from its weakness (slowing top-line growth) to its strength (AWS growth).
We’ll find out soon enough if that tactic works.
Ahead of the tape,