The Exchange

Amazon Earnings: Investors Could Be Less Forgiving of a Miss This Time

The Exchange

By Marek Fuchs

Amazon’s (AMZN) earnings reports are often a bit of a curiosity shop: The bottom line might be a bitter disappointment but all is forgiven if the top line comes in suitably flush. The temptation, as a consequence, is to fundamentally ignore Amazon’s fourth-quarter profits, which are due to be reported after the bell on Tuesday. Indeed, in the lead-up to the coming report, plenty of media outlets – including Seeking Alpha – are indulging in such financial nihilism. In a preview, they termed the company’s earnings “largely meaningless.”

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Perhaps meaningless is in the eye of the beholder, but with Amazon’s P/E ratio currently inducing vertigo, it's important to consider a pair of reasons why this classic notion of Amazon exceptionalism (“earnings don’t much matter”) might not hold.

First up, though, a touch of statistical and rhetorical background. Whichever metric you use, it's always hard to pin a defined sense of Amazon expectations upon the shore. The stock touched a 52-week high on Friday in hot anticipation of a strong earnings report, before falling off Monday in cold fear. In early trade on Tuesday the stock is continuing its decline, down around 1%.

And for every media outlet – such as Barron’s – that proclaims about the earnings outlook, “it doesn't look good,” there is a Motley Fool, which uses the word “love” in a headline when discussing Amazon's prospects for 2013.

So much for settling that disagreement. Here’s what we do know: Analysts are expecting Amazon to come in at 29 cents per share. That’s already 23.7% less than last year’s 38 cents per share but – and here’s the key – the consensus estimate has also tumbled from 50 cents over the past three months.

Since expectations have already received a rough going over, traders will be in a far less forgiving mood than usual. After all, when companies miss expectations that have already been cut to ribbons, traders see a business in a fractured state and management without a clue. As a result, revenue will have to beat the projected $22.28 billion – already a nearly 28% increase over the year-earlier total of $17.43 billion – by quite a length in order for traders to overlook an earnings shortfall with the usual shrug.

And then there is Apple (AAPL). Unless you’ve departed the planet for a time, you know that Apple missed projections in a big way last week. That sets the stage for investors – particularly of the technology persuasion – to be a lot less forgiving. Is Apple Amazon or is Amazon Apple? Of course not. But we’re about talking state of mind here. Amazon has earned the benefit of the doubt, as had Apple. The entire concept of benefit of the doubt, however, was punctured, for the immediate future, by Apple.

It is misplaced to predict doom for Amazon, but with capital spending a constant drain on profits, increased competition for the Kindle and a consumer that is fitful at best, it is just as hard to envision them beating expectations by any meaningful degree. Even in the unlikely even that they do, the market will – looking at the recent cuts – see it more as an issue of expectations than inherent strength.

And if you are playing earnings, you are playing a game of expectations. Here, you can’t sidestep the fact that there are appreciable differences in the atmosphere and underlying facts that will greet Amazon’s fourth-quarter report. This go round, Amazon traders, often prone to forgive and forget, might not be quite as apt.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.

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