Event: AMZN reports Q1 earnings tonight after the close, the options market is implying about a 8% move (using our Implied Move calculator here), which is quite close to the 4 qtr avg move of ~8.75% and the 8 qtr avg move of ~8.4%.
Sentiment: Wall Street analysts are fairly bullish on AMZN, with 29 buys, 13 holds, and 2 sells, and an average 12 month price target of ~$315 or about 16% higher than current levels. The stock has negligible short interest at less than 2%, which is surprising when you consider how controversial the stock is from a valuation perspective.
Price Action / Technicals: The 3 year daily chart shows a stock in a long-term uptrend, but in a near-term range. In fact, for most of 2013, the stock has oscillated back and forth between 255 and 280, where it opened on its last earnings report, only to sell off (circled in green):
The 3 year chart shows that the 200 day moving average (in black) is still rising, indicating the long-term uptrend. $250 is crucial support for several reasons. First, that’s around where the stock closed the year in 2012. It has also acted as support several times in 2013. And it coincides with the rising 200 day ma. Against that, the obvious level on the upside is around the all-time, at 284.72.
Fundamentals / Valuation: Despite a $1 billion sales miss in AMZN’s all important Q4 as a result of weaker than expected unit sales, the company beat on Gross Margins, and this is good because the less crap they sell for no profit, the higher the overall margin contribution will be. Much like EBAY, the more diversification away from their core business the better off the company’s profitability will be. Bulls are betting that as AMZN’s mix shift of business moves towards a greater percentage of Third Party sales and Web Services which include cloud computing and storage, that the company will start to demonstrate greater profitability and thus begin to grow into its valuation.
Investors seem most concerned with investment levels and how and when this will translate into increased operating margins. The chart below shows the fairly steep drop off in op margins as the company has expanded into web services, invested dramatically into a broader distribution network and lost lots of money on selling each Kindle. Despite the big drop off, investors are buying for the anticipated earnings leverage on these investments.
Investing/shorting AMZN based on typical valuation metrics has been a fools errand. While the company is expected to grow sales for the next 3 years above 20%, earnings remain the elusive variable and analysts are expecting AMZN to hit peak earnings this year of 3.45, from a 10 year low of .30 last year. My sense is that the company will have to do lot of things right and have better than expected results in growth areas overseas to get close to these estimates.
Vol Snapshot: AMZN has certainly seen higher IV in previous earnings events. May IV stands at about 45, which is high, and will come into the mid to high 20’s following the event, but is lower than what the stock has seen in many of its prior earnings reports. Here’s a look at the past 2 years with IV30 in red and HV30 in blue:
Total options open interest is interesting nearly evenly split btwn puts and calls with the largest single lines of open interest in this Friday’s weekly options expiration: 8800 of the Apr26th 295 calls, 5400 of the Apr26th 285 calls, 4800 of the Apr26th 305 calls and 2k of the Apr26th 275 and 300 calls
Expectations Per Bloomberg:
- 1Q GAAP EPS est. 10c (range 26c loss/shr-38c EPS)
- 1Q rev. est. $16.14b (range $15.7b-$16.7b); Jan. 29, AMZN gave rev. forecast $15b-$16.6b
- 1Q oper. profit est. $218m (range $3m loss-$453m profit); Jan. 29, AMZN gave forecast for operating income between $285m loss-$65m profit
- 1Q gross margin est. 25.2% (23.6%-26.9%)
- 2Q rev. est. $15.93b (range $15.3b-$16.7b)
- 2Q oper. profit est. $285m (range $25m-$498m)
MY VIEW: Since reporting their Q4 results, AMZN is up about 4.5% vs the SPZ that is up about 5.5% in that same time period, and essentially matching the index’s ytd gains. IN a market that has shown its share of irrational exuberance for stocks/sectors once considered to be boring (staples, healthcare & utilities) it is interesting to see stocks like AMZN treading water. We have been on the record that AMZN is one of the best company’s on the planet if you are a consumer, but we just don’t get the investors fascination with the stock given its inability to make profits on their sales at a level that is expected for 98% of the other publicly traded companies in the world. We are obviously predisposed to be short, yet the stocks consolidation this year btwn 260 and 280 suggests that a material improvement in margins could cause the stock to establish a new range above 280, while a push out in margin improvement could cause a re-test of its 200 day moving avg which it has not closed below in a year.
AAPL’s high implied move into earnings, and the lack of movement post should cause options traders to take a little pause before establishing long premium positions in front of the print. We are looking at different ways to play the event and will be sure to post anything that catches our eye.