AMZN: Q1 Earnings After the Close (Or Lack There Of) & A Defined Risk Way To Play For the Previous Lows

by Dan April 26, 2012 1:19 pm • Commentary

Nice Summary of Expectations From Bloomberg:

PREVIEW: 1Q: Watch Margin, Kindle Updates
By Brian Welcher

April 26 (Bloomberg) — reports 1Q post-mkt.
● 1Q EPS (GAAP): 7c (range loss of 16c-EPS 24c)
● 1Q rev.: $12.9b (range $12.5b-$13.4b)
● 1Q operating income: $99.4m (range loss $43m-profit of $214m)
● 1Q operating margin: 0.9% (6 est.)
● 2Q sales: $12.8b (range $12.2b-$13.8b)
● 2Q operating income: $184m (range $3m-$332m)
● AMZN gives sales, operating income forecasts.
● Margins, cap-ex on continued investment in retail, media, technology: Nomura
● Comment on investments in digital content, fulfilment centers, AWS infrastructure, related margin impact: Macquarie


Original Post April 26th, 2012 at 1:19pm:  Q1 Earnings After the Close (Or Lack There Of) & A Defined Risk Way To Play For the Previous Lows

AMZN reports Q1 after the bell tonight. The options market is implying about a 7.5% move vs the trailing 4 qtr avg move of about 8%.  Put another way the options market is expecting about a $6.5 billion market cap move one way or the other tomorrow in the stock!  

Sentiment:  The Street fairly mixed on the name with 23 Buys, 17 Holds and only 1 Sell, while short interest has ticked up of late to almost 3% of the float.

Price Action: The stock is up almost 12% ytd, somewhat under-performing the Nasdaq which is up about 16%.  The stock is up about 10% since gaping lower in early February after the company MISSED sales estimates in their all important Q4.

Expectations: When the company disappointed on Q4 they also issued guidance for Q1 that was below consensus and wide enough to drive a truck through.

Q1 Guidance:  Operating Income range from a loss of $200 million to a gain of $100 million, vs consensus at the time of a profit of $268.1 million.  Revenue Guidance was for $12 billion to $13.4 billion.

Consensus Est:

Q1  EPS: .07, Revs: $12,9B      Op Margin: 1.7%

Q2  EPS: .19, Revs: $12,835B   Op Margin: 2.1%

2012  EPS: 1.27, Revs: $62,812B  Op Margin: 2.4%

Consensus sees Op Margins going up all year with Q3 at 2.3% and Q4 at 2.9%


Implied vol (red) has spiked going into the earnings event even as the stock seems to have been range-bound, as seen in its recent actual vol (blue) which has been quite low. Implied vol tends to come in hard following earnings, anywhere from 25% to almost 50% last time around. This is something that needs to be kept in mind if you are playing any outer months. Clearly the weeklies, with expiration tomorrow is a simple one day move play.

[caption id="attachment_11011" align="aligncenter" width="642" caption="AMZN HV vs IV from LiveVol Pro"][/caption]

The monthly skew shows the weeklies jacked, in both Apr27s (red) and May4s (yellow), regular Mays (green) are higher than average but not terribly off from out months. But remember, vol across the board tends to come in hard in this name following earnings.

[caption id="attachment_11012" align="aligncenter" width="637" caption="AMZN monthly skews from LiveVol Pro"][/caption]


MY VIEW ON THE STOCK:  I want to start by saying something I have said many times, AMZN is a great company for its customers, less hassle at better prices, the value proposition is obvious.  This is not something I think can be said for shareholders of this company.  To buy the stock you have blind faith, faith that some day this company that provides a tremendous service to millions of consumer can figure out how to make a reasonable profit off of their tens of billions of dollars in sales.   SO FROM HERE ON OUT, KNOWING MY PREDISPOSITION ON THE STOCK, BULLS MAY WANT TO TAKE THE FOLLOWING VIEWS WITH A GRAIN OF SALT.  THIS IS NOT A STOCK I WOULD BUY, AND WILL ALWAYS BE PREDISPOSED TO SHORT IT AS I DO NOT BELIEVE THEY WILL EVER GROW INTO THEIR VALUATION.

Here is the official RISKREVERSAL view on the name:

For the largest online retailer in the world, 2012 is supposed to be the year when all the trees that have been planted start bearing fruit.  AMZN is one of the only 140 P/E names ever to have had almost 50% negative EPS contraction the previous year (2010-2011), while able to maintain a still fairly ridiculous forward multiple.  The reason for that high P/E but weak earnings is that analysts and investors viewed last year’s poor EPS as a direct result of their investments in developing their service and content business, diversifying away from pure product sales on their website.  Analysts see 2012 as the liftoff year, and sparkling earnings growth from then on makes a happily ever after story.

What’s most incredible to me is that even the best case scenario for AMZN does not yield a reasonable valuation until 2014.  Put another way, if AMZN beats Wall Street consensus estimates in for 2013 by 20%, that is $3.10 of EPS, which means that AMZN still trades on a 1 year forward P/E of more than 60!  2 years is a long time for any business, and that’s putting exceptional faith into a company, even one that has revenue growth of 40% a year.

Digging deeper into the numbers and the research, this quarter seems crucial both for its results, but also for its guidance.  The bulls are arguing that investment in the cloud and in selling content should pay off this year, making up for last year’s operating margins of 1%.  Consensus margin estimates see quarter over quarter sequential growth throughout the year as those past investments pay off.  Q1 consensus margin is 1.7% and Q2 is 2.2%, and those numbers might be more important than revenue consensus of 12.9 billion for Q1 (similar number expected in guidance for Q2) since investors finally want to get some earnings from this stock.

I would make one last point about AMZN.  I view it as a classic example of great company, bad stock.  I love using, I appreciate the expansion of their services, and I buy more on in each passing year.  But I also think my love and appreciation are due to the fact that they give their services away for too cheap.  I could sell lemonade for a penny a bottle and become the largest seller in the world, IF my investors were willing to keep giving me funding.  NFLX is the most recent example of a company that had a great service, but gave it away for too cheap, and it eventually caught up with them when they were forced to raise prices.  AMZN is a stronger model than NFLX, but the risk remains that they have simply been undercharging for too long, rather than “investing in the future.”

No surprise then that we’re looking at a bearish trade set up for this earnings, with our focus specifically on weaker Q2 margin guidance as a prick in the 2012 margin expansion story.

ONE Last Disclaimer, we obviously have no smoking gun here and this stock has tended to trade fairly erratically on small upticks in op margins, if you get one here, the stock is very likely to head straight back to the late March High of 210 which also coincides closely to the implied move.  We want to make a medium or so conviction bet with defined risk that they disappoint on multiple metrics and the stock goes back to the previous low from February.

MY TRADE: AMZN ($194.25)  Buy the May 185 / 170 / 155 Put Fly for ~2.30

-Buy 1 May 185 Put for 5.05

-Sell 2 May 170 Puts at 1.65 for a total of 3.30

-Buy 1 May 155 Put for .55

Break-Even on May Expiration:

Profits: btwn 182.70 and 157.70

-max gain at 170 of 12.70,

-profit of up to 12.60 btwn 182.70 and 170 and btwn 170 and 157.70


-Max loss of 2.30 above 185 and below 170

-losses of up to 2.30 btwn 182.70 and 185 and btwn 157.30 and 155