$AMZN Q3 Earnings Cheat Sheet

by Dan October 23, 2013 2:45 pm • Commentary

Event:  AMZN reports its Q3 earnings tomorrow (Thursday Oct 24th) after the close.  The options market is implying about a 6.5% one day move, which is above the 4 qtr avg of about 5.5%, but below the 8 qtr avg of about 8.25%.

Sentiment:  Wall Street analysts are positive on the stock, with 34 Buys, 12 Holds and No Sells, with an average 12 month price target of around $336.  The stock is up 30% year-to-date to a new all-time high this week.  Short interest has not moved much over the past 2 years, and is currently at 2% of float.

Options Open Interest:  Open interest is skewed to puts by a ratio of about 1.1 to 1, though recent activity has been slightly more skewed to calls, with the 20 day average call to put ratio around 1.1, and the 10 day around 1.2.  The weekly 330 calls and the weekly 300 puts have the most open interest in the short-term.

Price Action / Technicals:  AMZN’s weekly chart shows a stock that has not traded below its 100 week moving average since 2009.  Clear picture of a steady long-term uptrend:

AMZN weekly, 50 day weekly ma in pink, 100 day weekly ma in green, Courtesy of Bloomberg

In the short-term, stock’s important breakout levels in 2013 are the $285 level (which coincides with the 50 week moving average) that was breached in July and the $314 level that was breached in September.  The only upside level to watch is the high from this week, at $337.11.

Volatility:  Implied vol is up into the event. The Nov options sit at about 40 vol, and will fall to the mid 20’s afterwards. So expect about a 35% vol compression:

Screen Shot 2013-10-23 at 10.26.06 AM
from LiveVol Pro

Our View:   The 2012 story for AMZN was investment, with the company sacrificing profits for market share and to expansion into new products like Kindle and data-centers.  Analysts expect earnings to rebound substantially this year, back above 2011 levels and then nearly double in 2014.   To buy AMZN at current levels, or stay long one has to believe that the company will continue to grow earnings and slowly but surely see better than expected profit margins.

Of particular interest on the conf call tomorrow will be Q4 guidance after EBAY’s warning last week speaking to a slower e-commerce environment.

Investors would love to see a deceleration of the growth rate in R&D as a % of sales which would suggest improving margins.

CEO Jeff Bezos has proven on many occasions during AMZN’S public company existence that he could care less about near term metrics that investors and analysts care about, if he sees an opportunity for AMZN to enter an attractive market, he will do it at a hit to earnings/margins.  And at the end of the day, while the stock has been volatile during these periods of investment, the stock is still only 3% from its all time highs. Regardless we are not buyers no matter how much share they take for the Holiday season, the proof will be in their profits!   Great company for consumers, been a great stock for shareholders, but the company’s ability to grow into its valuation should cause investors to take some pause at all time highs.  I know, I am the dope who cares about slim margins, all the company has to do is stop spending and bear the fruits of all their labor, just don’t want to be the one left holding the bag when Bezos sets his sights on the next big initiative.