Lesson Idea: Why Did Amazon’s Stock Price Drop 10% After They Reported Earnings Today?

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Oct 23, 2014
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Lesson Idea, Investing, WebQuest, Current Events

The day that Amazon reports earnings tends to be a volatile one and today is no exception, with its stock price dropping 10%.

While I am not a fan of encouraging students to go the active route and pick stocks (I’m a passive indexer as I discuss here), I think this WebQuest where students get to play super sleuth will help them understand how expectations are a key driver of short-term stock prices (with earnings driving their long-term stock price performance) while also learning about Amazon’s business model.

Activity:  Have students find 4-5 articles and summarize their findings as to why Amazon’s stock price.  Points to emphasize in classroom discussion:  1)  Expectations matter; miss the analyst estimates and your stock price gets punished  2)  Investors focus on different measures; revenue growth may matter for fast-growing, newer companies while earning growth matters for more established, larger companies  3) Amazon plays in lots of different businesses that students may or may not be aware of (e.g., cloud computing).

Here are a few articles I found (more will be published overnight as their earnings release came at 4pm ET today):

  • Chart showing revenue growth for each of Amazon’s major businesses:  Merchandising, Media and AWS (Amazon Web Services).  The pink line shows the overall growth, which is now hovering around 20%.

AmznRevenues

  • Reuters focused on their disappointing 3Q sales results as well as their 4Q projections (the all important Holiday season) for the sharp drop in the share price:

Amazon.com Inc’s (AMZN.O) sales projections for the crucial holiday quarter disappointed Wall Street and third-quarter results missed forecasts, sending the online retailer’s shares 9 percent lower on Thursday.  After an unusually busy first half of the year that saw the online retailer spend on developing everything from mobile phones and Hollywood-style production to grocery deliveries, investors were ready to see it curtail its ambitions and start delivering sustainable profits.

But not only did it post a much larger loss than expected, Amazon also projected 7 to 18 percent revenue growth over the busiest shopping period of the year, a far cry from the 20 percent-plus pace that had convinced investors to overlook its persistent lack of profit in the past.

  • Fortune focused on Amazon’s model of investing heavily in their businesses, which now include original TV shows (which might explain the loss in the recent quarter):

Amazon traditionally funnels much of its profits into expanding its already gargantuan business, resulting in razor-thin margins — and this quarter proved no different. The e-commerce giant reported a loss of $437 million on revenues of $20.58 billion, a 20% revenue increase year-over-year, but well below Wall Street’s estimate of $20.84 billion.

A significant chunk of that money went into content and technology — a spending area that jumped 40%. That’s unsurprising given Amazon’s announcement last quarter that it would spend over $100 million on original video content, including the well-received original TV show, “Transparent” with “Arrested Development” actor Jeffrey Tambor.

  • Companies also hold an earnings conference call to provide investors with an opportunity to ask management questions about their business results and future prospects.  They typically last 30-45 links.  Here is a link to a tape of the call held on 10/23/14.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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