Stocks will go up until they don't

Amazon reported earnings last week. What would you think about the market reactions to the following earning report?  "Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion." And its operating income actually beat estimates -- $510 million vs  $489.9 million. Its shares should shoot up to moon, right? Nope! Amazon's shares fell almost 10 percent a few minutes past 4 p.m., after the company reported the earnings. What went wrong? Well, whether a stock goes up or down is often not about the actual results but about the expectation which has already been factored into the stock price. For Amazon, the expectation for its sales was over $26 Billion. In the past few years, the market has become more and more lavish in expecting what Amazon can do, which has pushed its price to an unbelievable valuation: 20 times its sales. No company, regardless how wonderful the business it, can meet this kind of unrealistic expectation. Yes, its share price can keep going up until it cannot. I think this is just the beginning that the market is coming back to the reality. This reminds me of another crazy expectation for a stock used to be the Wall Street darling: the First Solar (FSLR). The high expectation pushed it to $300 per share until the final reckoning kicked in: its share price dropped like a rock to $10. The lesson? Any dream will come to the time of wakening and any stock price will eventually follow and reflect its real business status, not the inflated expectation.

Last year, I made two predictions for Alexion (ALXN) and Tesla (TSLA). Both were and are still the darlings of the Street with unbelievable valuation but both are still going against the gravity and keep going up, big time. Of course my prediction that they would go down from this high level has been a total failure. Yes, I'm wrong until now but I have my words here that the reality will kick in eventually at some time. I don't know when but I know it will. Just be careful, extremely careful if you are long for such darling stocks.