What It Would Take for Amazon to Reach an All-Time High

Concerns about profits and cash flow have kept Amazon range-bound in recent months.
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Compared to some of its big-tech peers, Amazon (AMZN) - Get Report is looking like a laggard these days.

As Apple  (APPL) , Facebook (FB) - Get Report, Alphabet and Microsoft (MSFT) - Get Report hover near or at all-time highs -- on Thursday, Alphabet (GOOGL) - Get Report became the fourth company to cross a trillion-dollar market cap -- Amazon shares haven’t seen the same robust growth. Amazon crossed that trillion-dollar milestone in August 2018, but its market cap has fallen to $924 billion since. Shares of Amazon closed at $1,864.72 on Friday.

“The principal reason has to do with cash flow and margins; I think most investors think they should be making more money than they are,” said John Conlon, chief equities strategist at People’s United Advisors.

In its third quarter earnings report, Amazon issued lighter-than-expected guidance for the holiday quarter and also missed profit expectations, posting EPS of $4.23 versus a consensus of $4.59. The earnings result was also significantly below the $5.75 Amazon earned in Q3 2018, despite its continuing to grow revenues at a robust clip.

Amazon management pinned the third-quarter profit miss on investments in its one-day shipping program, a costly undertaking that involves beefing up its own delivery capabilities. The company estimated the cost of ramping up one-day shipping at $1.5 billion just for the fourth quarter. In total, it spent $9.6 billion globally on shipping in Q3, up 46% year-over-year.

Another question mark is AWS. Amazon’s cloud business is the biggest fish in the pond for now, but as the industry evolves, it would be unwise to count out second-place Microsoft Azure. Last year, for example, a fiercely sought-after Pentagon cloud contract worth $10 billion went to Microsoft, not Amazon -- fueling speculation that a newly competitive cloud era is upon us. Given AWS’s stature as a profit-generating powerhouse, any significant momentum towards Azure or others could spell bad news for Amazon investors.

To allay concerns about cash flow, margins, or any other concerns, Amazon management could work harder to justify some of their investments, and what they expect to gain and when. But that’s not particularly Amazon-like, Conlon added.

"I’ve seen Amazon go through periods where they lag, then all of a sudden investors are in love with it again,” he said. “They’re more interested in playing their cards closer to the vest.”

If history is any guide, Amazon investors will see another blowout quarter eventually -- it's just a question of when. For the fourth quarter, analysts are expecting GAAP EPS of $4.05 per share on revenue of $86 billion. 

The company is scheduled to report its fourth quarter results on Jan. 30. Amazon shares are down 1.75% since the beginning of this year. 

Amazon is a holding in Jim Cramer's Action Alerts PLUS member club