Name That Trade: $AMZN Edition

by Dan January 29, 2013 2:51 pm • Commentary

Below please find our preview of AMZN’s Q4 earnings to be released tonight after the close, and read my latest trade on the stock (here).  Readers of the site know that we tend to be a tad contrarian, not just for the sake of it, but where we think we have identified some sort of disconnect btwn the qualitative and the quantitative inputs that we use to evaluate stocks and or situations with that of the broad market sentiment.

As detailed below, AMZN’s price performance of the last few years may be outstripping the potential for continued fundamental gains.  The stock’s recent price performance suggests other wise, and I AM NOT WILLING TO STEP IN FRONT OF THIS PRICE ACTION without defined risk, but I am very willing to respond to the numerous inquiries from nervous longs who still have AAPL’s 12.35% loss post their results last week fresh in their minds.  Just to put that loss in context, AAPL’s 2 day loss post its Q1 results was equal to one third of AMZN’s existing market cap.

Risk Mitigation Strategies:

As we laid out below in our preview, implied volatility in AMZN, while heightened, is not exactly nearing all time highs from prior earnings cycles, so stock replacement strategies could be in order for those  looking to lock in gains but don’t want to miss further upside and want to define their risks (calls, call spreads, call flys or short put spreads).

For those not looking to sell existing long positions, but worried about potential downside as they are about missing any near term upside, we suggest they consider collaring their long stock position.

Here is a theoretical example vs 100 shares of stock at ~ $270.

  • Sell 1 Feb1st weekly 290 call at ~$4.30 and use the proceeds to
  • Buy 1 Feb1st weekly 250 put for ~$4.30

Break-Even on Friday Feb1st Expiration (meaning with long stock):

  • Profits of up to $20 btwn 270 and 290, stock called away at $290, a bit shy of the implied move.
  • Losses of up to $20  btwn 270 and $250, but protected below that point.

Trade Rationale:  Again, an investor would collar their stock if they were more worried above extreme downside and think that upside could be limited to within 5-10% following results and wouldn’t mind taking their profits on their long at 290.

We looked at several trades into the print but decided that our April expiration trade still had enough of a shot on a selloff that adding additional trades didn’t make sense for us.



Original Post Jan 29th, 2012 @ 11:33am:  $AMZN Q4 Earnings Preview

Event:  AMZN reports their Q4 earnings after the close tonight, the options market is implying about a 8.6%* move following the results, which is a tad shy to the 4 qtr average of ~9.%.  The stock has rallied on average ~10% (+6.87%, 7.87% & 15.75%) after the prior 3 qtrs.  * With the stock trading at ~$270 the Feb1st weekly 270 straddle is offered at ~$23.40, so if you were to buy that you would need a move of atleast $23.40 or ~8.6% by Friday’s close to break-even.

Sentiment:  Wall Street analysts remain fairly optimistic on the stock with 31 Buys ratings, 11 Holds and 2 Sells and avg 12 month price target of ~$300.   More than a few analysts have upgraded the stock to a buy in the two last months at or near all time highs.   Short interest in the stock sits at a mere 2% of the float.

Options volumes show no major shifts in sentiment in the past 2 weeks.  The 20 day call to put ratio is around 1.05, and the ratio is 1.15 in the past week.  Open interest on calls versus puts has not changed dramatically either.

Price Action / Technicals:  AMZN recently made a new all-time high, but this new high was not as bullish a breakout as it might seem at first glance.  First of all, it was made on relatively tepid volume, and on weakening momentum relative to AMZN’s initial push to new highs above 250 in September.  Secondly, the immediate rejection of those new highs in the past two trading days might indicate an exhaustion of buying interest.  The real test for the sellers though is around the $250 support level, which served as resistance in 2011 and 2012 on several occasions.

5 yr AMZN chart from Bloomberg
5 yr AMZN chart from Bloomberg

Valuation / Fundamentals:   A year ago, when AMZN reported their 2011 Q4 results, the company missed consensus estimates on a few important metrics (including sales, eps and operating margins), despite growing sales 35% year over year.  The company had a whole host of excuses, blaming weak video game and console sales and the increased adoption of third party sellers.  I would expect that the company faced similar struggles in Q4 2012, with additional new ones (like weaker than expected Kindle sales).

If investor sentiment is any gauge of a company’s financial performance one would think that AMZN is firing on all cylinders despite its eye-popping valuation.  To be long AMZN at or near all time highs you must believe that the the company’s spending spree of the last few years will sooner than later translate into increasing profits and margin expansion.  If this doesn’t happen in the next couple quarters my sense is that investors could hit the pause button as the current valuation will be nearly impossible to grow into.

Vol Snapshot: At just under 50,  AMZN’s average implied vol is much lower than it has been going into its past few earnings announcements. Historically it’s close to average, but definitely on the light side of average. Feb1 weeklies are about 112 vol atm, while Feb regulars are about 55, and March 39. Expect Feb and March to settle in around 30 following the report. Here’s a look at AMZN vol over the past 2 years. Notice how much less IV (red) has risen into the report compared to the 3 of the last 4:

Screen Shot 2013-01-29 at 8.57.58 AM
2 year IV30 vs HV30 from Livevol Pro


My View:  As I wrote last week in the Word, there was only one other large cap stock on the planet that had the sort of performance that AMZN did off of the financial crisis lows (AAPL).  AMZN is up over 700%, and in my view, there is most definitely a stock bubble here, but trying to pick the top could be costly.  Investors don’t seem to care that the company is earning less on more and more sales.  My sense is that AMZN’s recent price appreciation has something to do with investors’ recent move out of AAPL into potentially faster growing companies.  AAPL’s bubble bursting is most definitely a positive for AMZN, but I can not for the life of me imagine how the AMZN price performance vs lack of profit bubble won’t also burst in the coming months.

I am currently long a wide Apr Put Fly (12/21/12 -New Trade $AMZN – The Best Not-For-Profit Company in the World), which is not a play on tonight’s earnings, but an intermediate term bearish bet playing for a sentiment turn similar to that of AAPL’s since its all time high made in Sept.  While I am clearly negative on the stock, YOU WOULD HAVE TO HAVE YOUR HEAD CHECKED TO BE SHORT, HIGHS OR NO HIGHS, CRAZY VALUATION OR NOT, THE SENTIMENT IN THE STOCK RESEMBLES A MANIA IN MY OPINION, AND IF AAPL’S RUN OF THE LAST FEW YEARS TEACHES US ANYTHING, PICKING TOPS IS FOR THE VERY DEEP-POCKETED INVESTORS.

We are looking at earnings trades and will post anything that we choose to trade.  Stay tuned.


Bloomberg Preview:

By Beth Mellor
Jan. 29 (Bloomberg) — Amazon scheduled to report 4Q
results post-mkt today.


  • 4Q GAAP EPS est. 27c (range 38c loss/shr-53c EPS)
  • 4Q rev. est. $22.23b (range $21.4b-$22.8b); AMZN gave rev. forecast $20.25b-$22.75b in Oct.
  • 4Q oper. profit est. $212.7m (range loss $65m-profit $519m); AMZN saw operating loss $490m to profit $310m
  •  4Q gross margin est. 21.9% (20.5%-23%)
  • 1Q rev. $16.85b est. (range $16.3b-$17.3b)
  • 1Q oper. profit est. $261.4m (range $58m-$491m)

* 4Q expected to be in-line with ests.; increase in mix of
third-party sales may result in better gross/operating
margins at expense of slower rev. growth: Cantor (buy)
* 1Q rev. guidance may be below consensus, Pacific Crest
(outperform) says; Piper Jaffray (overweight) also notes
that AMZN has historically guided 1Q below Street
* Signs that AMZN is nearing the end of its three-year
investment cycle, during which pro-forma operating margins
have contracted, will be key: Topeka (buy)
* Opportunities for AMZN to substitute fixed costs for unit-
variable costs also key question: Morgan Stanley
* NOTE: AMZN Dec. comp. sales rose ~30% Y/y, Nov. comp. sales
rose ~44% Y/y, Oct. comp. sales rose 42% Y/y, according to