While the technology bull market continues at full speed, AMZN has been left behind ever since its January all-time high of $408. The stock is down 2% today after news today that the company cut the price of its Fire Phone to $0.99 from $199, with a two year contract from AT&T. AMZN is losing a lot of money at the $0.99 price point, especially since the phone already comes with 12 months of free membership on Amazon Prime.
The news is just one more example of Amazon’s focus on revenues over earnings. Amazon bulls always point to the revenue growth and the company’s breadth, reach, and innovative history as evidence that Amazon’s earnings power is merely a switch that can be flipped on at will. For the past 5 years, investors have been willing to believe that story, and management has benefited from a rising stock price as a result.
We noted the importance of investor sentiment for AMZN in a July CotD post, including the following observation:
As Enis just said to me, “you have to admire Jeff Bezos… as one of the very few public CEOs in the history of Wall Street (or any street for that matter) who has convinced investors and analysts to wait for profits for 2 decades”. A truly amazing feat.
In a market where valuation has not mattered until it does, and with a controversial stock like AMZN, having a memory of past sentiment shifts could be a helpful guide to identifying inflection points.
The 60 minutes drone interview with Jeff Bezos in December might have been one such sentiment top for the company. But AMZN is no normal company. When the “story” is the main driver of the current stock price, rather than current free cash flow or current earnings, shifts in sentiment can have a much bigger impact on the stock.
One shift that may be coming into play was the apparent cynicism of what the Fire phone represented. The phone was presented almost entirely as something that would make buying purchases on Amazon easier. It’s tough to sell people on a phone when the pitch is, “look how much money you will spend with us!”
Amazon has declined nearly 20% since the January high, even as the Nasdaq has rallied nearly 10% in that period. The stock is now at a crucial inflection point of $340, which has acted alternatively as support and resistance over the past year:
The stock did a fairly nice job filling in most of the earnings gap, but with Friday’s news of their longtime CFO stepping down next year, this morning’s price cut on the Fire Phone and the general sentiment shift among investors from half full to half empty, we think this could provide a good near term entry for a defined risk bearish trade targeting a move back to $300.
As a rule we don’t like to press shorts on a down day, much like how I wanted to give TSLA a little room to breathe after Friday’s sharp decline, so we are going to keep and eye on this one as we would likely look to enter long put spreads in Nov playing for the fourth consecutive sharp decline on an earnings event. Stay tuned.