$AMZN Q4 Earnings Preview

by Enis January 30, 2014 1:08 pm • Commentary

Event:  AMZN reports its Q4 earnings today after the close.  The options market is implying about a 7.5% one day move, which is above the 4 quarter average of 6%, but in line with the 8 quarter average of about 7.5%.

Sentiment:  Wall Street analysts are very positive on AMZN, with 36 buys, 11 holds, and no sells.  The average 12 month price target is around 427.  Like GOOG and FB, AMZN has been one of the large-cap tech leaders of the past year, up 41%.  While the stock is down about 3.5% so far in 2014, it hit its all-time high last week at $408.  Short interest is negligible at just 1.6% of the float.

Options Open Interest:  Options open interest is evenly split between calls and puts, a rarity among large-cap tech leaders (though similar to GOOG).  1 month average volumes have also been almost evenly split, with a slight bias towards calls.  The weekly 425 calls and the Feb22nd 400 calls both have around 4k of open interest, the most of near-term expiries.  The Apr 345 puts and the Apr 415 and Apr 465 calls have over 2k of open interest (possible call spread vs. put trade), and the Jan15 460 calls have over 4k of open interest.

Price Action/Technicals:  AMZN has weathered the recent market correction quite well, essentially flat on the year with today’s bounce.  The stock made a new all-time high last week, before falling back to its 50 day moving average for the first time since October:

AMZN daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
AMZN daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

AMZN has bounced today back above its rising 50 day ma (around $390.50), and the all-time high from last week is around $408.  The initial resistance after earnings in the $266-$367 area is first support after the 50 day, and the rising 200 day ma comes into play around $320.  On the upside, there is no resistance above the $408 high.

Fundamentals/Valuation:  We’ve discussed our lack of understanding about AMZN’s valuation on numerous occasions, so rather than beat a dead horse, here were our thoughts from a Name That Trade post in early December:

AMZN has basically been on our banned list for the past year.  We have expressed on numerous occasions our love for Amazon as a company, but our concurrent dislike for the stock.

We have only traded AMZN once in 2013, in a brief lapse of judgment.  We took that trade off for a loss at our stop in June, and have watched the stock’s 50% rise from afar ever since. This has been a situation where we have not traded our opinion for one main reason – the stock did not make sense to us at 150, 200, or 250, so there is little reason for us to argue against it rising to 300, 350, 400, or beyond.  In short, we don’t know why it’s going up, and even if we don’t like the stock ourselves, we’d rather not place our bets in a situation that simply doesn’t make sense to us.  The market is full of stocks that we’d much rather trade.

Volatility:  The January earnings reporting is seasonally the most important for AMZN, so it’s no surprise that implied volatility in AMZN is higher for this earnings event than for the other 3 during the year:

30 day implied vol in AMZN, Courtesy of LiveVolPro
30 day implied vol in AMZN, Courtesy of LiveVolPro

Implied vol will make a quick beeline to the high 20’s after the release.

Our View:  Since AMZN is on our banned trading list, we’ll be sitting out this earnings event.  One thing we’ll say is that AMZN management has continually pushed out its profitability point, reassuring investors along the way.  Investors have bought the management spiel without seeing the profits just yet.  So expectations are high.  AMZN might finally deliver on its promise in 2014 ($2.76 in EPS expected this year, which would be the highest in AMZN history), though it’s hard to say how much excitement is already priced in.