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Proof I have no idea how the stock market works: “Wow, that’s insane, their stock must have popped back over 2k because of this news!” checks ticker “Down 2.

Proof I have no idea how the stock market works: “Wow, that’s insane, their stock must have popped back over 2k because of this news!” checks ticker “Down 2.5% after hours...?”

mythz 7y ago
As always, it's due to the results being below Wall St estimates that are already priced into the stock which is still trading at an insanely expensive 100 P/E ratio.
- brlewis 7y ago
  Price/Sales is 4.01, lower than GOOG, FB or MSFT. They are going for growth, not profit. No valuation metric is perfect, but P/E is particularly useless for this company.
  - mythz 7y ago
    They're not a Startup, they've been "going for growth" for a 1/4 of a century, eventually you need to make a profit to justify your Market Cap. Just because profit isn't a goal for AMZN doesn't mean it's not a vital financial metric.
    - brlewis 7y ago
      You've presented a concise and valid set of statements that argue that a 100 P/E ratio might be expensive, but don't justify calling it insanely expensive.
    - djakjxnanjak 7y ago
      Revenue is up 20% year over year. The growth is real, not just a goal.
      - mythz 7y ago
        Only 20% is why the stock is down after hours, at 100 P/E AMZN is speculatively priced where they're expected to achieve infinite growth until they deliver financials that justify their valuation which Investors are betting on to happen before they hit any growth ceiling. There's also no room for an economy downturn which expensive stocks like AMZN are extremely volatile to.
        eloff 7y ago
        Growing 20% at Amazon's size is why the stock is worth so much. Almost all companies have slowed down long before this point. Amazon is still growing like a late stage startup. It's really a remarkable feat.
        mythz 7y ago
        Are Facebook, Google, Microsoft also still considered late stage Startups? FB Growth 28% YoY, P/E 26.51, Mkt Cap 573B GOOG Growth 19% YoY, P/E 25.90, Mkt Cap 788B MSFT Growth 12%, P/E 27.69, Mkt Cap 1.07T They all have a much more reasonable P/E. Agreed that it's harder to achieve growth from a massive base, but they're also priced from being able to continue doing so much better than their competitors.
        eloff 7y ago
        It's pretty meaningless to look at P/E for tech companies and compare it to a retail company. But for those companies it's also pretty impressive, market beating growth.
        mythz 7y ago
        > It's pretty meaningless to look at P/E for tech companies and compare it to a retail company. Tech stocks usually have higher P/E's than retailers, but for comparison here are the P/E Ratios of the world's largest retailers: WMT 38.8 COST 34.33 KG 9.24 WBA 10.75 HD 21.73 TGT 15.39
    - nicoburns 7y ago
      I don't understand why companies don't just let there stock price fall. This makes no material difference to the operating of the company, right?
      - changoplatanero 7y ago
        Rising stock price is helpful for retaining high value employees that are compensated with stock
        nicoburns 7y ago
        I guess. You could just pay them more though.
        allthecybers 7y ago
        > I guess. You could just pay them more though. This is a good idea. Stop the stock game and just pay a set base salary = to comp + stock. But we can’t do that because that would take all the fun out of seeing part of your potential income fluctuate with the whims and buffoonery of Wall Street.
        deleted 7y ago
        [deleted]
      - mythz 7y ago
        Shareholders own companies and a rising stock price benefits shareholders who elect the board members that run said company, a falling stock price isn't in anyone's interest who are invested in the company. It does help with M&A, raising capital, employee stock options + bonuses. It's rare, but sometimes you'll hear company Investors saying that their stock price is too high, like Zoom's CEO [1]. [1] https://www.bloomberg.com/news/articles/2019-04-18/zoom-video-soars-to-16-billion-valuation-in-u-s-trading-debut https://www.bloomberg.com/news/articles/2019-04-18/zoom-vide...
        nicoburns 7y ago
  - kgwgk 7y ago
    Comparing their price to sales ratio with that of companies in different businesses doesn’t make much sense either.
  - pmart123 7y ago
    P/S is also hard to use unless you did that for just AWS. Better to look at price to operating cash flow and better yet to capitalize R&D and leases.
  - xkjkls 7y ago
    A huge part of Amazon's business is retail where it never is going to have the same margins as any of the tech companies you listed. It's not really useful to compare Price/Sales in those contexts.
  - YZF 7y ago
    PEG EDIT: https://en.wikipedia.org/wiki/PEG_ratio https://en.wikipedia.org/wiki/PEG_ratio
  - MR4D 7y ago
    P/E is NEVER useless. For instance, if a company misses on earnings, then maybe it was an outlier - an odd quarter of sorts. But if you do it a few times over, then you are not the growth company you thought you were, and your 100:1 p/e will come crashing down to join everybody else (albeit maybe on the high side) somewhere in the upper 20’s or in the 30’s. But here’s the key - to do that, a stock would have to lose TWO THIRDS of it’s value. So a really high p/e signals really high growth expectations, and when a company isn’t growing at that expectation, the law of gravity again takes control and it will fall back to earth. Ignore it at your own peril.
    - jjeaff 7y ago
      But you are assuming that the end goal of the company and purpose of buying the stock is to participate in "earnings" in the form of dividends. But that is no longer the MO of many public companies now. The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment. Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise. To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral. Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.
      - kgwgk 7y ago
        You are the one conflating dividends and earnings. Even if a company chooses to reinvest retained earnings instead of returning cash to investors [1] it’s good to be profitable. Not just “to prove that you could”, but to avoid being just a money-burning machine (not Amazon’s case, mind you; they do not have “occasional earnings”, they’ve been consistenly profitable for the last 15 years). [1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.
  - m3kw9 7y ago
    PE is used as a comparison, if 10 of your peers are at 15 and you are at 30 you may be over priced or the expectations are sky high for you to grow beyond expectations
    - dahfizz 7y ago
      Amazon and e.g Google are not peers. The vast majority of Amazons business is retail, not tech.
      - jjeaff 7y ago
        That's up for debate. Of the revenues that are reported under Amazon retail, a significant portion (some estimates say way more than half) are fees collected from 3rd party sellers using both the online platform and physical warehousing services. I would argue that portion of their retail revenue is much closer to tech than retail, considering the margins are comparable to tech companies.
- DSingularity 7y ago
  That ratio is unreliable because of how they invest so much in future growth. Those capital and R&D expenses will not be around forever.
  - travem 7y ago
    That may turn out to be so in the long term, but it doesn't align with the current ethos of "It's always day one" at Amazon.
- freehunter 7y ago
  This is an important point. The stock market doesn't try to reward companies with higher share prices, it tries to find the correct price and stabilize there. If your company is expected to do well, that performance is already built into your stock price. Doing exactly as well as expected, even if you've doubled your profits, won't cause your share prices to change at all. Because everyone already expected you to do that, so they were willing to pay more money to own your stock even before the official news. The only thing that changes the stock market drastically is a surprise.
  - selestify 7y ago
    What about uncertainty? Surely the removal of uncertainty would cause a movement in the price even when a company performs exactly as predicted?
    - HugThem 7y ago
      No. Imagine a coin flip where you earn $1.1 on head and lose $1 on tail. What is the value of such a flip? $0.05 Now I offer you a coin flip with less uncertainty. It earns you $0.6 on head and loses you $0.5 on tail. Would you pay more then $0.05 for it? No. Uncertainty was reduced, but no value was created.
      - wutbrodo 7y ago
        This assumes that people operate only on expected value and don't care about variance at all, which is incorrect empirically, theoretically, and intuitively. The premium you pay for reducing variance is called a "risk premium", and it follows pretty trivially from the diminishing marginal utility of money (though there are many other ways to derive/explain it). This is the entire reason that insurance exists as a product: it's not designed solely to cover existential risks or to prey on the irrational.
        HugThem 7y ago
        Well, if you pay me more then $0.05 for the $0.6/-$0.5 coin flip, I will happily sell you some. How much do you want?
barrkel 7y ago
Buy on the rumor, sell on the news
mywittyname 7y ago
AWS growth is priced in. So if the stock priced dropped, then it's likely that most analysts were expecting ~50% YoY revenue increases.
mevile 7y ago
Revenue growth slowed due to the cost of one day shipping. It's not about revenue being up, but how much revenue is growing. If revenues go up some large amount, but it's up by less percentage wise than it was up last year that means growth is slowing.
- dwaltrip 7y ago
  Costs aren't factored into revenue.
deleted 7y ago
[deleted]
twiceaday 7y ago
The reason the stock market is hard to predict is because it itself is a prediction.
JumpCrisscross 7y ago
"Amazon.com Inc.'s record quarterly profit streak has ended, as the online retailer faced higher shipping costs, slowing growth from its cloud-computing business and a steeper loss in its overseas retail business. The company’s second-quarter profit rose 3.6% from a year ago to $2.63 billion after more than doubling last quarter. It missed analysts’ consensus estimate. Amazon had posted its best-ever profit the previous four quarters." https://www.wsj.com/articles/amazons-streak-of-record-profits-ends-11564086810?mod=hp_lead_pos1 https://www.wsj.com/articles/amazons-streak-of-record-profit...
m3kw9 7y ago
One of the main metric other than rev is shrinking, could be profit margins, or 20% isn’t as large as most analysts predicted
jczhang 7y ago
In addition to others points on this, public companies release a guidance, which in concert with analysts' own predictions of growth, is priced in.
mytailorisrich 7y ago
These days, every piece of information is already included in the quotations. Here it means that the large increase is not new information, probably that it does not match predictions/expectations is.
OJFord 7y ago
https://www.hl.co.uk/shares/share-research/201907/amazon-profits-slow-despite-revenue-jump https://www.hl.co.uk/shares/share-research/201907/amazon-pro... > For a company with sales of $233bn last year, Amazon makes surprisingly little profit. That's because the bulk of sales come from the retail business, which generates a comparatively modest profit margin. In fact outside the US, Amazon's retail business loses money.

Proof I have no idea how the stock market works: “Wow, that’s insane, their stock must have popped back over 2k because of this news!” checks ticker “Down 2.5% after hours...?”

mythz 7y ago

As always, it's due to the results being below Wall St estimates that are already priced into the stock which is still trading at an insanely expensive 100 P/E ratio.

brlewis 7y ago
Price/Sales is 4.01, lower than GOOG, FB or MSFT. They are going for growth, not profit. No valuation metric is perfect, but P/E is particularly useless for this company.
- mythz 7y ago
  They're not a Startup, they've been "going for growth" for a 1/4 of a century, eventually you need to make a profit to justify your Market Cap. Just because profit isn't a goal for AMZN doesn't mean it's not a vital financial metric.
  - brlewis 7y ago
    You've presented a concise and valid set of statements that argue that a 100 P/E ratio might be expensive, but don't justify calling it insanely expensive.
  - djakjxnanjak 7y ago
    Revenue is up 20% year over year. The growth is real, not just a goal.
    - mythz 7y ago
      Only 20% is why the stock is down after hours, at 100 P/E AMZN is speculatively priced where they're expected to achieve infinite growth until they deliver financials that justify their valuation which Investors are betting on to happen before they hit any growth ceiling. There's also no room for an economy downturn which expensive stocks like AMZN are extremely volatile to.
      - eloff 7y ago
        Growing 20% at Amazon's size is why the stock is worth so much. Almost all companies have slowed down long before this point. Amazon is still growing like a late stage startup. It's really a remarkable feat.
        mythz 7y ago
        Are Facebook, Google, Microsoft also still considered late stage Startups? FB Growth 28% YoY, P/E 26.51, Mkt Cap 573B GOOG Growth 19% YoY, P/E 25.90, Mkt Cap 788B MSFT Growth 12%, P/E 27.69, Mkt Cap 1.07T They all have a much more reasonable P/E. Agreed that it's harder to achieve growth from a massive base, but they're also priced from being able to continue doing so much better than their competitors.
        eloff 7y ago
        It's pretty meaningless to look at P/E for tech companies and compare it to a retail company. But for those companies it's also pretty impressive, market beating growth.
        mythz 7y ago
        > It's pretty meaningless to look at P/E for tech companies and compare it to a retail company. Tech stocks usually have higher P/E's than retailers, but for comparison here are the P/E Ratios of the world's largest retailers: WMT 38.8 COST 34.33 KG 9.24 WBA 10.75 HD 21.73 TGT 15.39
  - nicoburns 7y ago
    I don't understand why companies don't just let there stock price fall. This makes no material difference to the operating of the company, right?
    - changoplatanero 7y ago
      Rising stock price is helpful for retaining high value employees that are compensated with stock
      - nicoburns 7y ago
        I guess. You could just pay them more though.
        allthecybers 7y ago
        > I guess. You could just pay them more though. This is a good idea. Stop the stock game and just pay a set base salary = to comp + stock. But we can’t do that because that would take all the fun out of seeing part of your potential income fluctuate with the whims and buffoonery of Wall Street.
      - deleted 7y ago
        [deleted]
    - mythz 7y ago
      Shareholders own companies and a rising stock price benefits shareholders who elect the board members that run said company, a falling stock price isn't in anyone's interest who are invested in the company. It does help with M&A, raising capital, employee stock options + bonuses. It's rare, but sometimes you'll hear company Investors saying that their stock price is too high, like Zoom's CEO [1]. [1] https://www.bloomberg.com/news/articles/2019-04-18/zoom-video-soars-to-16-billion-valuation-in-u-s-trading-debut https://www.bloomberg.com/news/articles/2019-04-18/zoom-vide...
      - nicoburns 7y ago
- kgwgk 7y ago
  Comparing their price to sales ratio with that of companies in different businesses doesn’t make much sense either.
- pmart123 7y ago
  P/S is also hard to use unless you did that for just AWS. Better to look at price to operating cash flow and better yet to capitalize R&D and leases.
- xkjkls 7y ago
  A huge part of Amazon's business is retail where it never is going to have the same margins as any of the tech companies you listed. It's not really useful to compare Price/Sales in those contexts.
- YZF 7y ago
  PEG EDIT: https://en.wikipedia.org/wiki/PEG_ratio https://en.wikipedia.org/wiki/PEG_ratio
- MR4D 7y ago
  P/E is NEVER useless. For instance, if a company misses on earnings, then maybe it was an outlier - an odd quarter of sorts. But if you do it a few times over, then you are not the growth company you thought you were, and your 100:1 p/e will come crashing down to join everybody else (albeit maybe on the high side) somewhere in the upper 20’s or in the 30’s. But here’s the key - to do that, a stock would have to lose TWO THIRDS of it’s value. So a really high p/e signals really high growth expectations, and when a company isn’t growing at that expectation, the law of gravity again takes control and it will fall back to earth. Ignore it at your own peril.
  - jjeaff 7y ago
    But you are assuming that the end goal of the company and purpose of buying the stock is to participate in "earnings" in the form of dividends. But that is no longer the MO of many public companies now. The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment. Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise. To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral. Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.
    - kgwgk 7y ago
      You are the one conflating dividends and earnings. Even if a company chooses to reinvest retained earnings instead of returning cash to investors [1] it’s good to be profitable. Not just “to prove that you could”, but to avoid being just a money-burning machine (not Amazon’s case, mind you; they do not have “occasional earnings”, they’ve been consistenly profitable for the last 15 years). [1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.
- m3kw9 7y ago
  PE is used as a comparison, if 10 of your peers are at 15 and you are at 30 you may be over priced or the expectations are sky high for you to grow beyond expectations
  - dahfizz 7y ago
    Amazon and e.g Google are not peers. The vast majority of Amazons business is retail, not tech.
    - jjeaff 7y ago
      That's up for debate. Of the revenues that are reported under Amazon retail, a significant portion (some estimates say way more than half) are fees collected from 3rd party sellers using both the online platform and physical warehousing services. I would argue that portion of their retail revenue is much closer to tech than retail, considering the margins are comparable to tech companies.
DSingularity 7y ago
That ratio is unreliable because of how they invest so much in future growth. Those capital and R&D expenses will not be around forever.
- travem 7y ago
  That may turn out to be so in the long term, but it doesn't align with the current ethos of "It's always day one" at Amazon.
freehunter 7y ago
This is an important point. The stock market doesn't try to reward companies with higher share prices, it tries to find the correct price and stabilize there. If your company is expected to do well, that performance is already built into your stock price. Doing exactly as well as expected, even if you've doubled your profits, won't cause your share prices to change at all. Because everyone already expected you to do that, so they were willing to pay more money to own your stock even before the official news. The only thing that changes the stock market drastically is a surprise.
- selestify 7y ago
  What about uncertainty? Surely the removal of uncertainty would cause a movement in the price even when a company performs exactly as predicted?
  - HugThem 7y ago
    No. Imagine a coin flip where you earn $1.1 on head and lose $1 on tail. What is the value of such a flip? $0.05 Now I offer you a coin flip with less uncertainty. It earns you $0.6 on head and loses you $0.5 on tail. Would you pay more then $0.05 for it? No. Uncertainty was reduced, but no value was created.
    - wutbrodo 7y ago
      This assumes that people operate only on expected value and don't care about variance at all, which is incorrect empirically, theoretically, and intuitively. The premium you pay for reducing variance is called a "risk premium", and it follows pretty trivially from the diminishing marginal utility of money (though there are many other ways to derive/explain it). This is the entire reason that insurance exists as a product: it's not designed solely to cover existential risks or to prey on the irrational.
      - HugThem 7y ago
        Well, if you pay me more then $0.05 for the $0.6/-$0.5 coin flip, I will happily sell you some. How much do you want?

barrkel 7y ago

Buy on the rumor, sell on the news

mywittyname 7y ago

AWS growth is priced in. So if the stock priced dropped, then it's likely that most analysts were expecting ~50% YoY revenue increases.

mevile 7y ago

Revenue growth slowed due to the cost of one day shipping. It's not about revenue being up, but how much revenue is growing. If revenues go up some large amount, but it's up by less percentage wise than it was up last year that means growth is slowing.

dwaltrip 7y ago
Costs aren't factored into revenue.

deleted 7y ago

[deleted]

twiceaday 7y ago

The reason the stock market is hard to predict is because it itself is a prediction.

JumpCrisscross 7y ago

"Amazon.com Inc.'s record quarterly profit streak has ended, as the online retailer faced higher shipping costs, slowing growth from its cloud-computing business and a steeper loss in its overseas retail business. The company’s second-quarter profit rose 3.6% from a year ago to $2.63 billion after more than doubling last quarter. It missed analysts’ consensus estimate. Amazon had posted its best-ever profit the previous four quarters." https://www.wsj.com/articles/amazons-streak-of-record-profits-ends-11564086810?mod=hp_lead_pos1 https://www.wsj.com/articles/amazons-streak-of-record-profit...

m3kw9 7y ago

One of the main metric other than rev is shrinking, could be profit margins, or 20% isn’t as large as most analysts predicted

jczhang 7y ago

In addition to others points on this, public companies release a guidance, which in concert with analysts' own predictions of growth, is priced in.

mytailorisrich 7y ago

These days, every piece of information is already included in the quotations. Here it means that the large increase is not new information, probably that it does not match predictions/expectations is.

OJFord 7y ago

https://www.hl.co.uk/shares/share-research/201907/amazon-profits-slow-despite-revenue-jump https://www.hl.co.uk/shares/share-research/201907/amazon-pro... > For a company with sales of $233bn last year, Amazon makes surprisingly little profit. That's because the bulk of sales come from the retail business, which generates a comparatively modest profit margin. In fact outside the US, Amazon's retail business loses money.