Chart of the Day – $AMZN: What Would You Do With a Drunken Sailor?

by Dan January 8, 2015 12:26 pm • Chart of the Day• Commentary

Amazon had a tough 2014 as a stock, despite growing sales by an expected 20% year over year to a whopping $89 billion. I suspect the main reason for the stock’s 22% decline last year was the fact that they are only expected to report adjusted net income of $870 million on that $89 billion in sales.  As a company they seemed to be dogged by flashy entries into spaces like smartphones only to see their ambitions quickly squashed. Also, there’s the routine mockery of their drone program.  As a consumer though, Amazon remains a fabulous product, especially for Prime users, and the company will look to build on Prime’s growth in 2014, continuing to expand into multi-media, despite a price increase.

With the stock  banging along 18 month support, I thought it made sense to take a quick look at the set up into the company’s Q4 report due at the end of the month (not yet confirmed).  Looking at the 3 year chart below, the double bottom low from 2014 at $284 is fairly important to hold in the near term, with little by way of technical support till $250:

AMZN 3yr chart from Bloomberg
AMZN 3yr chart from Bloomberg

Despite the poor performance in 2014, Wall Street Analyst are not as negative as you would think with 30 Buy ratings, 21 Holds and only 2 Sells with an average 12 month price target of about $358, or about 19% higher than current levels.

The chart below of 30 day at the money implied vol (blue, the price of options) vs realized vol (white – how much the stock is moving) over the last 3 years shows options prices reaching expected pre-earnings levels:

AMZN 3yr chart of 30 day at the money IV (blue) vs Realized (white) from Bloomberg
AMZN 3yr chart of 30 day at the money IV (blue) vs Realized (white) from Bloomberg

Options prices seem neither cheap nor overly expensive on an outright basis, but with IV at 45%, vs realized at only 25%, the spread appears wider than usual pre-earnings and could make it very hard to own premium for directional purposes.

The set up from a trade perspective into the print, especially at the low end of the one year range is treacherous.  And here is why. AMZN CEO Jeff Bezos has never really cared much about Wall Street expectations, he is a long term thinker and has managed his business for the long term.  So much of what investors are punishing the shares for now, could be the very spending that actually has the stock some day grow into its valuation.  I think that is unlikely as its a very mature business already, but who am I to challenge a genius like Bezos’s vision? So here is the thing, maybe Bezos decides that enough ridicule is enough (at least in the markets) and he cuts back on spending in Q4 and chooses to guide to a lower spend in 2015, and thus greater profits. If that were to happen, the stock would be up 10% in a heartbeat.

If there’s no indication that the drunken sailor spending is set to end anytime soon, the stock likely stays in the penalty box for some time.

So you know the drill, playing for the big one seems fairly attractive given the precarious technical set up, poor sentiment and recent poor execution, but as always it’s the toughest trade on the board.