Amazon Smashes Earnings

Written By Briton Ryle

Posted October 30, 2017

I woke up in the wee hours Thursday morning with a wicked toothache. Sleep came in fits and starts the rest of the night, my own pathetic groans waking me up. By Friday morning, I was fully in the grip of an infected tooth. Swelling, low fever, chills, pain. I was delirious, but I knew it was time for a trip to the dentist. 

I habitually check in on the markets for the pre-market news and trading action. It can be especially intense during earnings season. I was pretty much on autopilot when I made my rounds on Friday. I have a foggy memory of shares of Amazon (NASDAQ: AMZN) trading up triple digits in the pre-market — like +$125. Pretty sure at the time I just wrote it off as an infection-induced hallucination.

But when I checked back in Friday evening, nope. That was no hallucination. Amazon had actually been up $125. In fact, it closed the day with a massive $128.52 gain. 

Now, a 13% one-day gain isn’t totally unusual. But for a company that’s already worth around $470 billion with a share price of $972 and a forward price-to-earnings ratio a little north of 120, yeah, it’s pretty unusual to see the shares jump up $128 in a day. Of course, Amazon is a pretty unusual company. 

The main reason for the big jump in Amazon’s share price was a big jump in revenue. Revenue jumped 34% over last year, to $43.7 billion. Net income rose to $256 million, or $0.52 per share. Analysts were expecting $0.03 per share. Oops. Missed that by a mile. Makes you wonder what kind of earnings numbers Amazon will get during the holiday season…

All About Potential

There are a couple interesting items buried in the report. Subscription revenue (like for Amazon Prime) was up 59% to $2.4 billion. You can pretty much pencil that number in every quarter going forward. In fact, it will probably grow, as Amazon Prime is the best deal going. And, of course, once Amazon gets you subscribed to Prime, you’ll probably spend more loot actually using your Prime membership. That’s a virtuous cycle if there ever was one. 

Then there’s Amazon Web Services (AWS), Amazon’s hosting and cloud operation. Revenue rose nearly 42% over last year to $4.58 billion, beating the average estimate of $4.52 billion. Now, data centers are among the unsung heroes of the internet economy. They provide the backbone for the internet and help companies cut costs. Amazon was early to the game with AWS. Microsoft’s Azure came later. 

Back in 2016, I recommended a data center stock to my Wealth Advisory subscribers at $33 a share. It’s currently at $111 for a sweet 155% gain. 

And back in April, when Amazon was trading around $900 a share and many investors were pointing to it as Exhibit A for the stock market bubble, I wrote right here in Wealth Daily that the stock was actually cheap. All you had to do was check the cash flow…

In 2014, Amazon had $6.4 billion in operating cash flow. In 2015, Amazon had $11.9 billion. Last year, it was $16.5. So let’s say cash flow is growing $5 billion a year. This fiscal year, Amazon could have $21 billion in cash flow. And next year, $26 billion. You telling me that with $26 billion in cash flow, Amazon can’t report $10 billion in profit and drop that P/E down to 30? 

Now at $1,120 a share, I’m not sure I’d call Amazon cheap, exactly. But I’m not sure I’d call it expensive, either. The simple fact is, we don’t exactly know what kind of profit potential Amazon has. I mean, we know it’s pretty good. And we also know that founder Jeff Bezos basically hasn’t made a single mistake in 25 years. It’s like he can see the future.

Another Great American Company

I consider First Solar a great American company. It’s got fantastic management, it’s an innovation leader, and it has zero long-term debt and a sizable cash hoard. I recommended it to Wealth Advisory subscribers back in 2014 a little under $50. We watched shares run as high as $75 a few months later. And we watched them sink as low as $27 earlier this year. 

But my assistant Jason Williams and I never wavered in our conviction: First Solar is a great company and a great long-term hold. 

So, yeah, we reiterated our support several times this year, as the stock was getting hit. We added it to our Monthly Top 10 list in June, when the stock was trading around $35, saying: 

People feared that a renewed focus on fossil fuels would kill solar. But they forgot that solar is a limitless resource and fossil fuels aren’t. And we’re going to have to switch to solar eventually. They also neglected to realize that some of the stalled revenues FSLR experienced had to do with pulling production of older cells and focusing on newer, far more efficient ones. That’s paying off for management. And they were able to report positive earnings last month instead of the loss everyone was expecting. The stock’s up nearly 14% since then and shows no signs of stopping. These price levels are still a deal, though. And I recommend adding shares before we see more growth. There’s upside to $75.

Well, First Solar reported earnings on Friday. The word “crushed” comes to mind. 

Analysts expected First Solar to report $824 million in revenue. Actual revenue was $1.09 billion, up 60% from a year ago.

Earnings were even better: $1.95 per share versus estimates of $0.85. And for the icing: First Solar reiterated its revenue guidance for 2017, in the range of $3 billion to $3.1 billion. That’s why the shares were up 20% on Friday and why $75 is likely coming fairly soon.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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