Amazon Drops on Earnings Miss

Amazon.com (NASDAQ: AMZN) dropped more than 5% following its earnings miss. Amazon's stock price has gone up by many multiples over the past decade, as it became the dominant player in ecommerce. The company accounts for 47% of all U.S.-based online sales. It has moved onto related businesses like shipping, logistics, inventory management, and Internet services. Remarkably, these units started out as solutions to Amazon's problems but proved to be so effective that they become sources of revenue themselves.

Although Amazon has been a high-flyer this past decade, the stock has been under distribution the past few months. It currently sits 14% below its all-time high set in October 2018. In comparison, the Nasdaq (QQQ) is just over 1% away from its all-time high which it set in July this year. Such underperformance is a new development for Amazon and worth watching going forward.

Amazon's Earnings

The major headline from its third quarter results was the company posting its first quarterly earnings decline in two years and forecasting another decline the next quarter despite expectations of record sales during the holiday season. The major factor behind the earnings miss is its aggressive investments to expand one-day delivery to more customers and for more items.

Amazon CEO Jeff Bezos is betting that Prime customers' demand for one-day delivery will continue to be insatiable. It also added 100,000 employees in the quarter. As of now, total headcount sits at 750,000. The increased hiring is primarily is due to the company's success and expansion in shipping and logistics. However, it's clearly a more difficult and low-margin business than its other lines of business.

Another important component of earnings was Amazon Web Services (AWS) which reported $9 billion in revenue and $2.6 billion of profit, accounting for the large bulk of Amazon's profits. For a while, AWS has been the most dynamic part of Amazon's earnings in terms of growth and margins. However, recent quarters have revealed slippage in the growth rate and decline in margins as competition increases.

Bought the Dip

Amazon's stock opened more than 5% lower and was much more lower in post-market and pre-market trading. However, investors aggressively bought the dip and recovered the bulk of its losses, finishing just 1% lower. Typically, this type of reaction to an earnings miss is a positive near-term signal for the stock as it indicates investors were prepared for the bad news and used it as an opportunity to accumulate shares - a capitulation of sorts. It also creates a logical stop point and price level that should hold, if the trend has turned higher.