Amazon.com Inc. (AMZN) is slated to report fourth-quarter 2014 results on Jan 29, 2015. In the last reported quarter, Amazon recorded a negative earnings surprise of 30.14%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Last quarter, Amazon announced a loss of 95 cents per share on revenues of $20.58 billion, missing the Zacks Consensus Estimate of a loss of 73 cents and revenues of $20.86 billion. This marked the third negative earnings surprise in the past four quarters.
Growing the company over the long term has been Amazon’s target and the quarterly results are largely considered irrelevant. But Amazon guided lower sales for the fourth quarter in the range of $27.3 billion – $30.3 billion, significantly short of the Zacks Consensus Estimate of $30.98 billion.
This is big news. Investors have for a long time been looking past disappointments in the bottom line for +20% top-line growth each quarter, which Amazon has provided for the past five quarters now. But guiding lower for the all-important 2014 holiday season is a red flag.
Huge demand for electronics and general merchandise coupled with growth in the Amazon Web Services business will probably be the driving factors for fourth quarter results.
Earnings Whispers
Three estimates for the soon-to-be-reported quarter were revised downward in the last 7 days while there were no upward revisions. The Zacks Consensus Estimate for the quarter declined from 23 cents to 22 cents per share over the same time frame. For the current year, one estimate moved south over the last one week.
Furthermore, our proven model does not conclusively show that Amazon is likely to beat earnings this quarter as it does not have the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, currently stands at -4.17%. This is because the Most Accurate estimate of 23 cents is lower than the Zacks Consensus Estimate of 24 cents.
Zacks Rank: Amazon currently holds a Zacks Rank #3 (Hold), which when combined with a negative ESP, makes surprise difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks that Warrant a Look
Stocks worth considering in the technology sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Ellie Mae, Inc. (ELLI) with an Earnings ESP of +40.00% and a Zacks Rank #1 (Strong Buy)
Cognizant Technology Solutions Corporation (CTSH) with an Earnings ESP of +1.69% and a Zacks Rank #2 (Buy).
Hutchinson Technology Inc. (HTCH) with an Earnings ESP of +7.69% and a Zacks Rank #2
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