Name That Trade – Navigating The $AMZN

by Dan April 23, 2015 12:57 pm • Commentary

Event: Amazon (AMZN) reports Q1 results after the close, the options market is implying about a 9% one day move, which is shy of the 4 qtr avg of about 10%.  

Price Action / Technicals:  The stock is up 25% on the year, most of the gains coming since their Q4 report on January 29th:

[caption id="attachment_53037" align="aligncenter" width="600"]AMZN 1yr chart from Bloomberg AMZN 1yr chart from Bloomberg[/caption]

The stock has traded in a a 37% range so far in 2015, essentially between $290 and $390, which is also inside the 2 year range from $245 to $405:

[caption id="attachment_53038" align="aligncenter" width="600"]AMZN 2yr chart from Bloomberg AMZN 2yr chart from Bloomberg[/caption]

Just as was the case in Netflix (NFLX) last week prior to its Q1 earnings report, the prior all time high is very much in traders’ sights for AMZN.  I think its important to look back at the 2 year chart of NFLX, a controversial stock like AMZN, as a reminder that when out of favor stocks come back in favor, they can do so in a violent fashion:

[caption id="attachment_53039" align="aligncenter" width="600"]NFLX 2yr chart from Bloomberg NFLX 2yr chart from Bloomberg[/caption]

Expectations:  I think it is safe to say that they are not low given the company’s new found interest in “variable expense productivity”.  Following last quarter’s results, Barron’s Tiernan Ray succinctly summed up the stock’s reaction:

The stock’s rise comes despite the fact the forecast for this quarter’s revenue is lower by a billion dollars, and the company is forecasting a loss of as much as $450 million versus Street expectations for an operating profit of $130 million.

But the big focus today is the higher operating profit, called “consolidated segment operating income,” or CSOI, which rose 18%, faster than the 15% rise in revenue, and was 3.5% of revenue at $1.04 billion

Another positive in the quarter was 53% growth in paid members to the company’s “Prime” membership service. Szkutak said growth was even faster overseas than it was domestically. That came despite the fact that the company actually raised the price of Prime last year.

Analysts also like that the company said this quarter it will start to report separately the revenue for its cloud computing division, Amazon Web Services.

Top ranked internet analyst Mark Mahaney from RBC identified the following items to focus on in a note to clients:

1) Gross margin trends – We continue to believe that consistent and material Y/Y GM expansion over the past 2+ years has been one of the most important fundamental factors for Amazon over that timeframe. The trend needs to continue for the shares to move higher, and we continue to believe it will. We are looking for Q1 gross margin of 30.3%, up 150bps Y/Y;

2) Operating margin trends – We continue to believe that Amazon’s very heavy investments in China, other international markets, and in a range of projects (AWS, video content, marketing support for new device launches) will continue to weigh on overall profitability. We are looking for a 1.9% CSOI margin in Q1, down modestly from 2.5% in Q1:14;

3) Impending AWS Segment Disclosure – Per management commentary on the December quarter earnings call, Amazon is expected to soon provide for the first time disclosure on its AWS segment. We believe that this disclosure will highlight the very different positions of its three main businesses (N. America Retail, International Retail and AWS) – and we believe that this disclosure will for the first time make it appropriate to value AMZN on a sum-of-the-parts basis.

My View: I’ll be wrong forever on this stock.  While I am a very happy long term customer of Amazon, I have not once ever considered the stock a rational investment.  Last year the company had $89 billion in sales, and registered an operating profit of only $178 million. I am not a fan when it comes to investing in the belief of a man, like Jeff Bezos, and the promise that one day all of his spending will results in insanely great profits. To me this is a greater feels scenario.  With the stock within 5% of its all time high, I think its safe to say that the story as articulated to investors seems to be resonating, just not for me.

If the company puts up a set of results similar to Q4, then the stock likely realizes the implied move to the upside, and possibly surges similar to NFLX did last week. But I think if the results are inline to expectations with usual conservative guidance then the stock is likely to be up or down only a few percent. And if the company does an about face on last quarters “profitability” then the stock easily re-traces half of the move since late Jan, so $350.

For Us, No Conviction, So No Trade, but here are a couple ways that we would consider playing if we had the conviction to commit premium that could go disappear in an instant if we go the direction wrong:

Hypothetical Trades:

Bullish – Buy the April 24th weekly 400/425/450 call fly for 4.00

– Buy 1 April 24th 400 call for 11.10

– Sell 2 April 425 calls at 4.10 (8.20 total)

– Buy 1 April 450 call for 1.10

 Rationale – This is a low premium directional bet targeting the implied move to the upside. There aren;t alot of cheap ways to play for the implied move to the upside. This has risk if the stock pulls a NFLX and blow through the short 425 strike but that’s pretty low probability.


Bearish – Buy the April24th/June 355 put calendar for 5.30

– Sell 1 April24th weekly 355 put at 4.30

– Buy 1 April 24th weekly put for 9.60

Rationale – It’s unlikely AMZN simply pukes a ton of its recent gains all at once on the event. It’s possible, but not likely. Therefore the best way to target a move lower is to play for an inline move down with a set-up where one could beenfit from continued weakness over the next few months. This calendar risk 5.30 and will be profitable if there’s any move lower within reason. Its ideal spot if for the stock to be around $355 tomorrow as the Weekly puts will lose most of their value even after a move in the stock towards their strike because they expire tomorrow at 4pm.