3rd Trade Update AMZN: Closing the Balance of the Calendar

by Dan February 1, 2012 9:46 am • Commentary

Trade Update: Feb 1st, 2012 at 10:50am: With the stock settling in here at 176.60, we’re closing the balance of this trade at 3.60. The position is essentially a bearish bet for further weakness in the stock at this point. It’s better to take the money and run and look to play from a different level in the future.


Trade Update Feb 1st, 2012 at 9:40am: with AMZN at $173 I closed half of my Feb weekly/March 165 Put Calendar at 4.35 for a 1.91 gain.  Will look to close the balance after determine where I think March vol should settle once the stock finds a floor.


Trade Update Feb 1st, 2012: AMZN reported Q4 earnings last night and oddly beat on EPS, which the company had guided lower in Oct, and missed street consensus for Revenues that came in at about the mid-point of their previously guided range that you could have driven a truck through.  The revenue miss came from a greater % of sales coming from 3rd party sellers where they earn a small fee, while the eps beat came from better than expected cost controls.  Enthusiasm around Kindle Fire gained plenty of attention heading into the print, but unfortunately the company did not break out units in the category,  and it appears that many analysts might have gotten a bit too overzealous on their expectations just prior to the report.

On top of showing decelerating revenue growth in a make or break quarter, the company guided Q1 earnings and sales below expectations….The net of it to me, it is hard to make a case why anyone needs to own AMZN at current valuations in a period where the company is clearly focused on investing in the business at the expense of margins.

MY TAKE:    With the stock trading down about 9%, roughly inline with the implied move, I would expect the stock to find some support somewhere btwn 170 and 175 today…..remember if you are a trader and are short into the print it is fairly difficult not to take profits after such a dramatic move lower……additionally AMZN is a cult stock and just as the Sell Side appears to be defending their Buy ratings and their avg price targets north of $200, investors who are in it for the long haul are likely to add on this sort of weakness.

[caption id="attachment_8456" align="aligncenter" width="300" caption="7 Month AMZN chart from Bloomberg"][/caption]


SO what to do with the Feb3rd weekly/March 165 Put Spread I bought yesterday?  If the stock opens around $176 (where it is currently trading in the pre-market) the Feb weeklies (that I am short) which are $11 out of the money should start to quickly lose value with 3 days left to expiration, once the stock settles in, and then it all depends where March volatility settles, this  will determine the profit of the trade.

On the open this trade should be fairly profitable, and I will look to take half off, especially if i have near a double……

Please check “Quick Hits” after the open for instant trade updates.   But for those who aren’t glued to your screens all day (like some of us poor souls), this spread is likely to move around fairly quickly, and just like NFLX  calendar call spread last week,which shot to the strike that I isolated, this should make the trade immediately profitable.  I will look to take profits on half after the open.

Original Post Jan 31st, 2012: AMZN-Report Q4 After the Bell, Our Preview & View on Feb Weekly/March Calendars

AMZN ($190)–Update on Trade Below.

Event: Company reports their Q4 results tonight after the close.

-the options market is implying about a 10% move vs the 4 qtr avg of about 7.9%

-The Implied move can fairly easily be figured by taking the Feb 3rd weekly 190 straddle  offered at about $19 and then divide by stock price of $190.  You will need a $19 move higher or lower on Friday’s close to break-even.

Below is a cool little graphic from LiveVol that shows the price action of the last 4 qtrs for AMZN in days before and after earnings for the previous 4 qtrs, that generally shows a continuation of the move after the event.  

[caption id="attachment_8432" align="aligncenter" width="521" caption="4 month earnings from LiveVol Pro"][/caption]


Sentiment, Price Action & Technicals:

-The Street is generally positive with 24 Buys, 15 Holds and only 1 Sell, while the short interest sits at about 2.3% of the float (per Bloomberg’s latest reading).

-The stock is up about 11% ytd, but still down about 22% from the Oct 2011 high.

-With the stock at about $190, the chart faces significant resistance the $200 level dating back to last spring, while also settling below a defined uptrend that had been intact since mid 2010.

[caption id="attachment_8424" align="aligncenter" width="300" caption="2 YR AMZN chart from Bloomberg LP"][/caption]


Q4: .19 eps and $18.25b in sales.  Company guided to sales to $16.45- $18.65b while expecting an op incomes loss btwn $200 and $250 million.

Q1:   .35 in eps and $13.bb in sales

2012: 1.82 in eps and $65.5b in sales

Wall Street analysts have been raising their Kindle Fire unit estimates significantly in the last couple weeks as many have gone from 4 – 5 million units to some as high as 6 million.

Morgan Stanley who has Overweight rating and 12 month $250 price target had the following to say in a note to clients data Jan 30, 2012;

We are tactically negative on CQ4 earnings. FX headwinds and margin pressure from continued long-term project investments make 1H:12 a transition period for Amazon.com. We foresee continued share gains and margin improvement in 2H:12 and 2013 leading to material upside for long-term investors.

The stock may face short-term challenges: We see a potential “speed-bump” ahead for longer-term investors. Aside from trading opportunities, Amazon.com’s stock may experience some weakness due to short-term investor concerns over potential simultaneous sales growth deceleration and margin compression.

Margin concerns are legitimate, but we think the headwind is cyclical, not structural: Amazon.com’s investments in video content, AWS, Kindle Fire development / unit sales and product category expansion / market share gains have had a detrimental effect on Adj. Operating Margin. While Amazon.com has gone through investment cycles in the past, none have been as prolonged or as deep as the current one (CQ4:11 will mark 7 consecutive quarters). We believe the likelihood for an inflection point increases with each quarter. Either the investments will work and sales will respond or Amazon.com will moderate investment spending – either way, margins will likely improve.

On A more positive note, Jeffries, who has a  Buy and a $240 12 month price target, had the following to say in a note to clients data Jan 30, 2012:

We expect AMZN to report strong 4Q results, with potential revenue upside from Kindle sales. While increased sales of owned inventory and higher promotions/free-shipping are likely to keep margins under pressure ST, we remain positive on Amazon LT as it represents one of the best investment plays on secular growth in global e-commerce.

Potential upside from Kindle. We have adjusted our estimates to include Kindle Fire sales, which was the top selling item on Amazon during the holidays. Jefferies’ checks in Asia suggest that the 4Q build for Kindle Fire was 5-6M units (we’re estimating ~4M sellthrough), with e-reader’s shipments of as many as 12M units in Q411. The build for 1Q is ~4M units for Fire, according to the same checks. (see tables 1 & 2 for our forecast).

Thin margins to persist. We estimate 4Q11 operating margins at 0.7% (EBITDA margins at 2.7%) but we have little visibility into this metric, given continued expansion of DCs, price promotions/free shipping, investments in new initiatives (cloud computing/video streaming…etc.) Importantly, the recent price cut on Kindle e-reader and Kindle Fire’s $199 price-point are likely to keep margins razor thin for some time. For 1Q Outlook, current consensus stands at $13.36B in revenue and 1.9% in op. margin.


MY VIEW: I am not sure that I can remember a company that the Street was more positive about its long term prospects, but more worried about the near term. AMZN is just one of the those companies that is too good to their customers, like selling their new tablet for less than their cost or offering free 2 day shipping for $85 a year.  AMZN CEO Jeff Bezos has a plan and in the near term that means to spend and invest in the business at the expense of their margins.  Again, as a huge customer I can’t argue with the strategy, but I am not sure that translates into a great investment opportunity in the near term. (full disclosure I did my best to support these guys, buying 7 Kindle Fires for Holiday gifts, and buying most other gifts from them, which excludes our near daily usual purchases for my home and office).

So what to do with the stock heading into what is likely to be a controversial quarter?  If the company disappoints on their revenue guidance (that is wide enough to drive a truck through) then margins will obviously dramatically disappoint and the stock could crater.  But if for some miracle the increased Fire units did help drive sales upside that help offset the street’s bearish margin view than you could see a massive short squeeze above the $200 resistance level with next stop $220.

It has proven to be a losing proposition to short AMZN strictly on valuation as the multiple has always been ridiculous, currently trading at about 100x 2012 consensus!  So if you want to be short you have to use valuation as just one input that helps inform your decision.

As most of you know I don’t buy stocks like AMZN, especially at a time I feel they are at an inflection point as it relates to their earnings model going forward.


Bought  AMZN ($193) Buying Feb3rd weekly/ March 165 Put Spread for 2.44

-Selling 1 Feb weekly 165 Put at .90

-Buying 1 March 165 Put for 3.34


I chose the 165 strike as I feel if the company was to really chop 2012 earnings the stock is likely to head back to the next huge support level.




Bloomberg Preview:
By Sarah Gill
Jan. 31 (Bloomberg) — Amazon expected to report 4Q today

• 4Q GAAP EPS est. 16c (loss 26c-43c)
• 4Q rev. est. $18.26b ($17.9b-$19.4b), saw $16.5b-$18.7b on Oct. 25
• 4Q op. profit est. $84.7m (loss $145m-$200m), forecast loss $200m-gain $250m
• 4Q pro forma op margin est. 1.4% (10 analysts ests.)
• 1Q EPS est. 35c (loss 12c-86c)
• 1Q rev. est. $13.4b ($13b-$14.9b)
• 1Q op. profit est. $268m ($72.3m-$528m)

• 4Q likely inline or slightly above avg. rev. est.; FX impact est. 0.02%, ~+$3m; recommend owning shrs into earnings: Piper Jaffray, Jan. 30
• Key again will be the largely discretionary op. income outlook; pro forma op. margin likely down with marketing, tech & content and fulfillment costs driving deleverage: Citi, Jan. 27
• A key number is proforma op margin; if 1Q margin is higher than 4Q it will be positive for stock, could signal trough margin qtr: Susquehanna, Jan. 31 in interview
• Any weakness in stock from re-investment talk is a buying opportunity: Deutsche Bank, Jan. 31

• AMZN earnings related implied move ~9.6%
• AMZN has had sequentially declining op margins over last 4 qtrs, likely continues this qtr: BGC, Jan. 31
• AMZN has missed rev. ests. 2 of last 6 qtrs, missed op. profit est. 6 of last 6 qtrs, EPS 3 of last 6 qtrs, shrs have fallen day after 3 of last 6 qtrs
• AMZN up 10% YTD vs. SPX up 4%