Amazon (AMZN) Takes Beating, Microsoft (MSFT) Encouraging

Friday, July 23, 2010

Amazon logoAmazon terrible, Microsoft excellent

Amazon (AMZN) shocked the Street missing estimates by 9 cents coming in at $0.45 versus expectations of $0.54. The top line was decent beating estimates of $6.5 billion with revenues of $6.6 billion. Demand was high for Amazon's products but the drastic price cut for the Kindle to $189 from last year's original price of $399 is taking the blame for much of the EPS shortfall and margin squeeze. Shares of AMZN are down 11% pre-market and dropping low enough to challenge the psychological $100 post-earning last night before rebounding.

Eddy over at Crossing Wall Street had an excellent evaluation of AMZN's earnings reaction. He has been bearish on shares for a long time and this report highlights the dangers of investing in companies with valuations like the 50 times trailing earnings AMZN holds.
This is the problem with owning a richly valued stock. Despite getting the enormous growth potential of the company, you always have to impress analysts. You have zero room for error. If you make one small misstep, you’ll be punished harshly.

Think of it this way. Amazon missed earnings by nine cents a share, yet the stock was down $15 a share. That’s the equivalent of a Price/Earnings Ratio of 166 for those marginal nine pennies. That’s obviously very high but that’s what you’re buying when you go after a hi-flier like Amazon.
Microsoft (MSFT), on the other hand, "saw strong sales execution across all of our businesses, particularly in the enterprise with Windows 7 and Office 2010". MSFT even offered investors some of the exciting developments: "Our transition to cloud services is well underway with offerings like Windows Azure and our Business Productivity Online Services, and we look forward to continuing our product momentum this fall with the upcoming launches of Windows Phone 7 and Xbox Kinect." MSFT exceeded on both the top and bottom line with EPS of $0.51 versus $0.46 expectation and revenues of $16 billion versus $15.5 billion. Shares are up a marginal 80 basis points pre-market.

S&P continues to bounce around, waiting to clear 1,100

Last week Friday the market looked horrible falling out of bed and dropping 261 points. Monday gave us a small bounce and Tuesday opened lower. Yet, buyers stepped in on Tuesday and mounted a large upside reversal. Wednesday though, proved that the sellers were not to be outdone and Bernanke spooked investors by talking about everything we already knew and the market dropped 1%. Even with a minor sell-off before the close yesterday the market still gained 2%. The S&P 500 is within 5 handles of the 1,100 level pre-market today.

It is fair to say most traders have been thrown for a loop this week as the S&P 500 is currently up 2.2% for the week yet follows the drubbing seen in stocks last Friday. I had short on the brain all last week and thought Friday confirmed my thesis. Now, I have taken all the shorts in and am anticipating an upside breakout. Perhaps I am being whipsawed, perhaps not. Honestly, I don't know, I'm just working on getting good prices and keeping stops tight. Today's action should clear things up a bit.

Disclosure: Long SPY.
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