$AMZN Q1 Earnings Preview

by Dan April 28, 2016 1:25 pm • Commentary• Trade Ideas

Event: Amazon.com (AMZN) reports their Q1 results tonight after the close. The options market is implying about 8% one day move tomorrow, which is shy of its 10 year average one day post earnings move of 9.2%, and below the 4 qtr average of 10.4%. With the stock at $620, the April 29th weekly 620 straddle (the 620 call premium + the 620 put premium) is offered at about $48, or about 8% of the stock price, if you bought that, and thus the implied earnings move, you would need a move above $668, or below $572 by tomorrow’s close to just break-even.

Price Action / Technicals:  Shares of AMZN are down 8% on the year, down about 11% from its 52 week and all time highs made in late 2015, yet up 32% from its 2016 lows made in early February and up 50% from its year ago levels.

Frankly I can’t really offer too many intelligent thoughts as it relates to the one year chart below. The all time high is just smidge below $700, while the 2016 low is about $475, the mid point of that range is just about $587, which corresponds with what was then a new all time high back in late July 2015

AMZN 1yr chart from Bloomberg
AMZN 1yr chart from Bloomberg

Maybe a tad more instructive could be the stock’s test of the epic parabolic “AWS” uptrend from early 2015. It broke earlier this year and that could serve as technical resistance:

From Bloomberg
From Bloomberg

Sentiment: Wall Street analysts, much like AAPL, FB & GOOGL remain overwhelmingly positive on AMZN with 41 Buy ratings, 6 Holds and NO Sells with an average 12 month price target of $741, or 20% above current levels.

Expectations from RBC Capital’s Mark Mahaney: 

Critical factors for Q1:

1) Gross margins – GM expansion has been an important fundamental factor for the stock’s outperformance. This trend likely needs to continue for shares to move higher. We estimate Q1 gross margin of 34.7%, up 250bps Y/Y;

2) Operating margins – Measured investments in International, AWS and other projects will weigh on profitability. We are modeling Q1 CSOI margins of 3.9% (+80 bps);

3) AWS Results – We expect AWS to remain a 50/50 business (50% growth, >50%+ EBITDA margins) and act as a material contributor to results. For Q1, we are modeling AWS Revenue of $2.5B, (+60% Y/Y), and Segment Profit of $715MM (29% margin);

4) Key NA Retail Results – We are modeling NA Retail Revenue of $16.5B (+23% Y/Y), and NA Retail Segment Profit of $659MM (3.9% margin).

amzncheat

My View Into the Print: This is just not my cup of tea. I was wrong the whole way up last year as their lack of profitability and investor focus on a small but high growth part of their business (AWS), and their willingness to disregard all else in the name of AWS growth spooks me.  Just to put the lunacy in context, last year on their $107 billion in total sales, the company recorded a net profit of $596 million on a GAAP basis, operating profit of only $2.23 billion. While bulls will point to eBitda of $10.8 billion, I think it is important to note that its the B in the whole ebitda thingy that should not be forgotten. And any way you slice it net income or operating profits are ridiculously low levels of sales.  If you have solely focused on valuation for reason to not own, or short AMZN then it has been a volatile 20 years for you. The stock has never traded at a multiple where one could make the argument for growth at a reasonable price, as can be done with FB.

So I can’t be of help. I’m a very happy long time AMZN customer I can tell you that the company’s lack of focus on profits has benefited me immensely on a personal level. But it does not motivate me as a prospective investor.  I know that’s not very helpful, but wanted to lay out some color prior to tonight’s earnings for those who are motivated either way.

We will follow up this post with another post with some options trade ideas for those with a directional inclination or current positioning.