Amazon reported record revenue for the fourth quarter but still missed earnings expectations by a mile. The company reported $1 per share when analysts had expected the company to exceed a $1.50 per share and the shares are taking a beating.
This type of volatility should not surprise anyone. In today's environment, it doesn't take much for a stock to be punished, especially if earnings miss expectations and Amazon's miss was a big one.
But why is the stock so volatile?
Amazon's price earnings ratio is stratospheric. It's trailing 12 month PE is about 800. That's less important than forward estimates as Amazon has clearly sacrificed earnings in the past while focusing on growth. But perhaps more scary is the forward PE which sits above 100. That's massively higher than its competition in the various businesses Amazon competes in.
I know the bulls say it doesn't matter, and it might not if you are a momentum investor. There's always money to be made on companies with rosy futures whose current earnings don't measure up. But if you're focused on fundamentals, you need to take heed of PE data; it matters.
Value investors have long avoided this stock given the company's penchant for not earning profits and instead focusing on capturing market share. To be sure, Amazon continues on an incredible spending spree in a variety of different businesses as it seeks to have the greatest possible impact in e-commerce. A good example of Amazon's desire to capture market share at the expense of profitability is its effort to compete with Google and Microsoft in the business cloud server space. It's a cutthroat industry.
Here are the questions you should ask about Amazon:
These are questions that investors have been debating even as a stock moved higher over the course of the last several years. Now, with tens of billions of dollars carved off its market cap because of this recent earnings report, it's time to ask if Amazon is just a large unicorn waiting to be revalued. If you're a buyer of the stock you need to look past current fundamentals and have a belief that Amazon can monetize their user base at some future point in time.
Lastly, ask one more question. At what point will Jeff Bezos say enough is enough in terms of sacrificing profit. Until that question is answered this company will continue to trade on sentiment and hope, not current fundamentals. Current trading is an illustration of that hope crashing into reality.
As a fundamental investor, we are staying away from Amazon for the time being. When the valuation is more reasonable and we have better clarity as to its plan to start turning a profit rather the growing market share, we might jump in. It simply is too much of a momentum play for our comfort right now. If you're a fundamental investor, it's probably not the right stock for you.
Commentary by Michael A. Yoshikami, the CEO and founder of Destination Wealth Management in Walnut Creek, California. He is also a CNBC contributor. Follow DWM on Twitter @DestinationWM.
Disclosure: Michael Yoshikami does not own shares of Amazon and has no other business relationship with the company. But Destination Wealth Management may buy shares for clients.
For the latest commentary on markets in the U.S. and around the world, follow @CNBCopinion on Twitter.
