Amazon (NASDAQ: AMZN) stock is proving, once again, the importance of that efficient markets hypothesis. For Amazon’s results show growth, yet the stock has fallen 8.5% premarket this morning. A larger company we might expect to be worth more, but that’s not how it has worked out – why?
The answer is in the guidance for future revenue growth.
This quarter just reporting operating income was at $3.7 billion against $8.9 billion a year ago. Well, we knew that the lockdown boom would fade. It’s also true that Amazon’s historical preference has been to reinvest within the operating period rather than to declare profit. Operating margin was 3.2% of sales, down from 8.2%. But again, that’s not out of line with historical preference for cashflow and margin allocation.
There was that loss reported, but that’s a non-cash charge against Rivian. Given that the stock price there has collapsed – along with so many of those trying to follow the Telsa copybook – then obviously, Amazon was going to have to write that down.
The real reason for the price fall is that guidance for future revenue is down on market expectations. Q2 revenue is now put at $116 to $121 Billion, as against the consensus of $125.1 billion. That might seem like a small difference, but that’s that EMH for you.
That EMH doesn’t say that markets are the efficient way of doing everything, rather that they are efficient at processing information. The implication of that is that all known information is already in prices. So, if the expectation for Q2 Amazon revenue is $125.1 billion, then the stock price includes that. We’ve not the new information that revenue is likely to be lower – so, therefore, the Amazon stock price declines to include that new information.
Looking at the basics of the business itself rather than the very short-term stock price movements, Amazon is once again telling us the same thing that so many others are. Yes, clearly, lockdowns and WFH led to massive jumps in online shopping. Yes, we all know that online is going to eat the world eventually. But what matters to stock prices here is how fast is it going to eat the world?
Using UK numbers just to illustrate, online, pre-lockdown, was eating some 1% of retail sales each year – US numbers are a little lower. Lockdown led, at one point, to a 10% jump of the entire market share. A big question was always going to be whether that jump would persist – would this be the new starting point for that gradual 1% to start from again? Or would there be a fall back and if there was, how much would it be?
The answer that’s coming in from near all of those reporting – including here Amazon – is that there is indeed a fall back. So the valuations based upon lockdown market share were a little overcooked. The future value of Amazon stock, therefore, probably depends upon estimations of how fast it’s going to return to – and how quickly it will do so once it starts again – eating that retail market share from bricks and mortar retailing.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage . 68 % of retail investor accounts lose money when trading CFDs with this provider . You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money .
Tim Worstall is a freelance writer specialising in economics and the financial markets.