The bad news on Amazon’s stock price is only beginning By Mark Hulbert | August 25, 2017
Analyst downward revisions tend to beget even more such revisions
CHAPEL HILL, N.C.—Bad news, Amazon investors: The company’s stock, already down 10% from its late-July high, is likely to decline even further.
That’s because of the behavior of Wall Street analysts, whose earnings revisions tend to come in waves. And the vast majority of those revisions recently have been to the downside.
This represents a big shift from the situation that prevailed as recently as 12 months ago. In August of last year, for example, 69% of Wall Street analysts who track Amazon AMZN, -0.05% revised upward their estimates of the company’s future earnings per share. Just 17% of analysts issued downward revisions that month.
So far this August, in contrast, there have been no upward revisions and 93% of analysts have issued downward revisions, as this chart shows. This is despite the company winning FTC approval for its intended takeover of Whole Foods Market WFM, +0.04% .
The reason this shift is relevant to Amazon’s near-term future: Analyst revisions don’t occur randomly. A downward revision is more likely to be followed by another downward revision than by an upward one.
The same pattern applies to upward revisions, by the way—as is well illustrated by Apple AAPL, +0.46% analysts over the last year. The consensus analyst estimate about Apple began to be revised upward in the summer of 2016, suggesting that many more upward revisions would be coming in subsequent months, as I wrote in a July 28, 2016, column.
Today, Apple’s stock is more than 50% higher.
There are several reasons why analyst revisions tend to be clustered together rather than randomly. These include:
• An inherent cautiousness. That’s because it’s unclear, on any given day, which of the myriad news stories about a company are of any real significance for its future prospects. Analysts’ natural reaction is to take a “wait and see” attitude rather than reacting impetuously.
• An inherent conservatism. This is related to analysts’ cautiousness: They are afraid of deviating too far from the consensus. As long as they don’t stray too far from that consensus, they are unlikely to lose their job when wrong. But if they go too far out on a limb and end up being wrong, they may need to start looking for other employment. As John Maynard Keynes famously put it, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
• A desire to avoid being a mere follower. This trait seems at odds with the previous two. But analysts want to avoid the appearance that they are merely following the consensus. In order to instead appear as though they are independent thinkers, analysts will wait a decent interval after others’ earnings revisions before doing so themselves.
• Snowball effect. A company’s stock reacts when previous analyst revisions lead subsequently to more revisions in the same direction. This in turn creates a climate in which analysts either view new developments through rose-colored glasses (when their recent revisions have been positive) or black glasses (when those revisions were to the downside).
To be sure, these historical precedents don’t amount to a guarantee that Amazon’s stock will continue to fall in coming months. And even if it does, it won’t necessarily fall as much as Apple’s rose over the last year.
Still, given the ways in which analysts typically behave, the preponderance of downward revisions recently suggests that Amazon’s stock in coming months will continue to struggle.
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