July 25th, 2008

Amazon (AMZN): A Game Plan

I’m sorry to dump this on you but I have to get something off my chest. I don’t get this “consensus estimates” stuff. Well, that’s not exactly correct — I don’t understand the emphasis that the big boys place on “consensus estimates” to sometimes generate huge changes in prices for few days after earnings announcements.

I understand that institutional investors have to rationalize their decision through economic models to indicate if a stock is over- or under-valued thereby justifying their buy/sell decisions. Of course, they could refer to stock charts but that would make it look like they’re relying on black magic, tarot cards or some other form of arcane mysticism.

So if their models indicated AMZN’s (Amazon) fair value should be around 70 and the company announced results different from their estimates, the herd would see that as justification to stampede the stock. According to Reuters:

AMZN shares rose as high as 17 percent on Thursday as the online retailer’s strong second-quarter revenue and profit relieved a wary Wall Street that has been bruised by recent disappointing results from consumer companies. Some analysts calculated that Amazon’s earnings actually fell below Wall Street consensus estimates, but most gave them credit for an unexpected gain related to the sale of its European DVD rental business and slightly lower taxes.

“Overall we think this was an outstanding quarter for Amazon given extraordinarily low levels of consumer confidence in the U.S. and the UK,” wrote Bernstein Research analyst Jeffrey Lindsay, who rates shares “Outperform.” Deutsche Bank analyst Jeetil Patel forecast that shares would rise on Thursday, a day after Amazon’s results were released, because many on Wall Street had been expecting grim news — whether higher operating expenses, significantly lower gross profit margins or weakening revenue projections.

Instead, the world’s largest Internet retailer posted a 41 percent rise in revenues and earnings that beat Wall Street forecasts, even excluding a one-time gain from an asset sale.

Give me a break. Who’ll remember in a month, a quarter, a year or five years these “consensus estimates” or how they compared to actual results. On the contrary, everyone will remember only how these results compared to last quarter and same quarter last year (Have you ever seen a service that reports both actuals and “consensus estimates” for the past, say, 5 years! I haven’t). Instead, large misses from “consensus estimates” only shine the spotlight on how incompetent the professionals are and how difficult, if not impossible, it is just to get “fundamental analysis” right. See the clear story in AMZN’s chart:

This doesn’t tell a compelling story to me. “I wonder whether the previous quarter’s report, or the 2007 annual report, contained any surprises?” he says with sarcasm. Let’s step back and take a longer-term view:

The number of price gaps over the past nearly three years is impressive. Either AMZN is always pulling surprise out of their hat or Wall Street pros can never get it right. What if we pull back even further? what would the chart tell us then?

Now we’re talking. This chart shows AMZN since its IPO. I wish I’d had the courage to buy AMZN any time within 6 months of the IPO because it turned into one of the tech bubble darlings increasing from 1.50 (adjusted for splits) to 110! Remember all the debate as to whether Jeff Bezos was crazy or not for building all those huge warehouses? Yes, he was crazy, crazy as a fox.

It’s taken eight years to digest that growth (during which time AMZN formed a huge symmetrical triangle). One buying opportunity was when it broke above the upper boundary trendline of that symmetrical triangle in April 2007 followed by a huge breakaway gap.

But now AMZN is bucking up against the trendline extending out from its all-time high in 2000. Breaking through that resistance is a huge hurdle. It’s been building up to making a run into new all-time high territory since the credit crises set in last July (forming a poorly formed descending wedge).

Buying here at 78, given all the economic headwinds presents some risks. But a move to 110, the current all-time high represents a 37.5% move. But there’s no telling whether it will make it there or when, whether the breakthrough attempt will be successful or not and when and, if successful, how much of a secondary, post-breakout consolidation will it take before a huge upward move can get started (these often happen and can take any consolidation form).

So here’s my game plan. The 37.5% looks enticing but I think I’d pass it up and wait for the big move above 110.

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