Should Long-term Amazon (AMZN) Investors Keep Their Faith in the Stock?

Those who’ve been holding onto Amazon (AMZN) stock for the long-haul might soon be cashing in. Blogger Michael Henage says the company has been “crushing estimates” and that the time has come where expense growth is slowing and earnings are exploding – so why is the stock down more than 20% from its 52-week high? Henage asks the question – “Did investors forget what they were waiting for?”

Henage references Amazon’s most recent quarter, in which sales growth came in at 29.3%. As the company invests in the future, marketing, fulfillment and other spending seemed to grow faster than the top line. But the blogger says Amazon is beginning to get a handle on spending and you can see it in the bottom line. AMZN EPS growth compared to last year was up by 1,000%.

The blogger references a couple of hiccups Amazon experienced in terms of spending, which he believes has had investors worried. With so many Prime customers and all of the free shipping, fulfillment expenses increased by 29%. Another concern for investors was company spending on technology and content with the expansion of Prime Video. Henage points out that despite the increase of 20% in spending, the costs were still below sales growth. Last year Amazon’s General and Administrative expenses increased by 50%, while this year the increase was only 8%. Henage comments on how the only area where expenses outdid revenue was in marketing. Though, the 33% increase is still less than last year’s 43%. “Given that marketing is used to expand the brand, and bring in more sales in the future, this is one cost investors can live with,” Henage opined.

The blogger questions why investors are selling the stock, suggesting it’s likely due to worries that the company’s days of fast revenue growth could be over: “Not only does this seem misguided, but cash flow is what investors should be watching.”

Henage has another hypothesis: investors are spooked by the company’s guidance for the fourth quarter. AMZN predicted sales growth between 10% and 20% year-over-year, which Henage notes for a company that has “treated investors to significant revenue growth” could be scary. He has a thought – “One question investors need to answer, is how realistic are Amazon’s projections? Some companies seem to low ball their outlook so they can turn in earnings that are better than expected. If we look at multiple quarters, Amazon’s projections followed by its results, seem to indicate the company’s projections are based in reality.”

Henage notes that in the last two years, Amazon has come through on its predictions for its fourth quarters, and this year should be no different. He cautions investors to steer clear of naysaying analysts who are bearish on AMZN.

“Amazon has a significant opportunity to continue to become more efficient in its spending. The company is already producing real free cash flow, which is what investors have been waiting on all along. If earnings estimates are too low, the stock’s valuation looks much cheaper than it first appears. Long-term investors are being given exactly what they wanted. The correction in the stock provides an opportunity to buy the shares, at what finally seems like a decent value,” Henage concludes.  (To watch Henage’s track record, click here)

Though Henage seems to be speaking to bearish analysts and investors, it seems like the street is very bullish on AMZN stock. TipRanks reviewed 37 analysts who are keeping watch over the e-commerce giant and all except for one are bullish, with one sidelined. The consensus price target stands at $2,164.29, showing an upside of 44%. (See AMZN’s price targets and analyst ratings on TipRanks)

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