$AMZN Q2 Earnings Preview

by Enis July 25, 2013 2:03 pm • Commentary

Event:  AMZN reports its fiscal Q2 earnings this afternoon after the close.  The options market is implying about a 6.25% one day move, which is in line with the 4 qtr avg of about 6.5% and below the 8 qtr avg of ~8.25%.

Sentiment:  Wall Street analysts remain bullish on the stock, and it’s up 20% year-to-date.  They have 32 buys, 12 holds, and 2 sell ratings on the stock.  Short interest has been stable around 2% for the past year.

Options Open Interest:  Call to put open interest actually favors puts by a ratio of 1.15 to 1, one of the few large cap tech names where there is more put open interest than call open interest.  Activity in the past month has favored calls though (1.2 to 1), as AMZN broke out to a new all-time high earlier in July.

Price Action / Technicals:  AMZN has been in a steady long-term uptrend ever since the bull market started in 2009:

Weekly chart of AMZN, Courtesy of Bloomberg
Weekly chart of AMZN, Courtesy of Bloomberg

The stock had showed relative weakness ever since its $285 high prior to January earnings, but finally broke above that level in early July, and has not looked back since.  $285 is obvious support going forward, while there is no real resistance since the stock is at all-time highs, though the upper end of the trend channel is around $325.

Fundamentals/Expectations:  Analysts are expecting 0.53 in adjusted EPS (0.06 GAAP EPS) and $15.73 billion in revenues for this quarter.  The consensus expected gross margin is 27.4%.

Analyst Commentary from Bloomberg:

  • Gross margin improvement likely on higher rev. growth in higher-margin categories; operating margin likely to remain constrained as co. opens more fulfillment centers: BMO (outperform)
  •  Unit growth may see “slight acceleration” to 31% in 2Q (from 30% in 1Q) following 4 qtrs of deceleration, Morgan Stanley (overweight) says; notes unit comps get easier in 2H though European macro weakness may be a headwind
  • Gross margin expansion needs to continue and paid unit growth needs to at least stabilize for shrs to rise: RBC (outperform)
  • Share gains may be muted as paid unit growth acceleration likely offset by gross profit growth deceleration, Operating income will likely be below consensus, as normal for AMZN: Topeka (Buy)
  • AMZN April comp. sales rose 20.5% Y/y, May comp. sales rose 25.8% Y/y, June comp. sales rose 30.6% Y/y, according to ChannelAdvisor data

Estimates/Guidance from Bloomberg:

  • 2Q GAAP EPS est. 6c (range 16c loss-36c EPS)
  • 2Q rev. est. $15.74b (range $15.45b-$16.33b); April 25, AMZN gave rev. forecast $14.5b-$16.2b
  • 2Q oper. profit est. $62.9m (range $160m loss-$288m profit); April 25, AMZN gave forecast for operating income from $340m loss to $10m profit
  • 2Q gross margin est. 27.4% (25.8%-28.4%)
  • 3Q rev. est. $17.0b (range $16.39b-$17.71b)
  • 3Q oper. profit est. $84.5m (range $210m loss-$261m profit)

Volatility:   30 day at the money implied volatility (blue line) is elevated as one would expect into earnings tonight, getting a little final tick up today on the heels of FB’s 26% rise, while 30 day realized volatility (white line)  has ground down to near 52 week lows.

AMZN 30 day at the money  implied vol (blue) vs 30 day realized vol (white) from Bloomberg
AMZN 30 day at the money implied vol (blue) vs 30 day realized vol (white) from Bloomberg

Aug  IV will likely come in 10 points to the mid 30s.  It is important to note that IV is at the lowest level prior to an earnings announcement in 2 years, that coupled with amazingly low realized vol suggests that investors don’t seem to bothered so to speak heading into tonight’s print.