The world’s largest online retailer, Amazon.com (AMZN) is a part of the golden group of tech stocks called FANG. FANG stands for Facebook, Amazon, Netflix and Google’s parent company Alphabet. Currently, these four tech companies are the hot favorites in the stock market and are considered a sure shot for investments.
However, Amazon recently has not had a good run in the stock market since its late July high of $1083.31. Share prices have dropped 11.5% in the last 4 week to $958, and analysts predict that the drop will continue.
The drop is because of the earnings per share (EPS) revisions made by the Wall Street analysts, after a disappointing earnings report released a day after its July high. Last year, at the same time, analysts were very positive about Amazon’s earnings per share. This year, however, analysts have been more pessimistic in their outlook – for a majority of the companies. So far this month, there have been no upward revisions; 93% of the analysts gave downward revisions despite Amazon winning FTC approval for the Whole Foods Market (WFM) deal.
The downward revision by analysts is not done randomly, and the analysts have given a number of reasons for the downward revision of Amazon stocks and have said that the stocks are in a ‘vulnerable’ position technically.
- The Amazon profit was way lower in their second quarter than expected. They also revised their earnings for the next 12 months by almost half.
- According to the analysts, Amazon stocks have displayed rather un-FANG-like behavior, meaning to say they have not be as bullish as investors have come to expect from the golden tech group. In 3 of the last 5 years, the Amazon stocks have had a 30% pullback. And, with the stocks showing another 10% drop while going into the (traditionally) worst month of the year, analysts are expecting the stocks to drop to around $900 or even $870.
- Analysts believe that Amazon stocks are showing classic signs of exhaustion, and that it is time for the stock prices to correct themselves. They expect the correction to drop the share prices down from the July high of $1.083.31 to a more stable $900.
Having given all this bad news, there is also a caveat to this whole story. Revisions on EPS tend to come in waves. So while Amazon’s performance may not have been its most spectacular lately, the tradition methods of evaluation also plays a role.
Analysts tend to be more conservative. Investors rely heavily on analyst data to make their decisions. This is a huge responsibility, and they would rather err on the side of caution than risk being wrong about a revision. Additionally, analysts do not all issue their revisions in one go. Various analysts will issue their evaluations at different times. So it becomes like a wave of revisions. So, a company reports lower-than-expected earnings. The first group of analysts release their revisions. The stocks go down. Then another group of analysts release their evaluations, and the stocks go down further. It also works for a company’s benefit, as in the case of Apple, whose stocks have gone up 50% in the last one year.
While the Amazon stocks have shown a decline this last month, this doesn’t mean the stocks are in danger. Amazon is “still taking over the world”, with its stocks going up by 28% this year. However, the company is beginning to realize that technology as well as marketing costs are much higher than they expected. Thus, until costs within the company are stabilized, this trend may continue.