Amazon (AMZN) – Climbing Up The Walls

by Dan April 27, 2017 11:36 am • Trade Ideas

Amazon (AMZN) will report Q4 results tonight after the close. The options market is implying about a 4% one day move tomorrow which is shy of the 4 quarter average post earnings one day move of 4.75%. The at the money weekly straddle is offered at $36. If you bought that and thus the implied earnings move, with the stock around $916 you would need a rally above $950, or a decline below $880 by tomorrow’s close to make money.

Shares of AMZN are up a whopping 22% year to date, and up nearly 30% from its post-election lows in November. Investors’ brief hesitation in November that President Trump might follow through with campaign AMZN anti-trust rhetoric quickly abated as CEO Bezos participated in some of Trump’s gatherings of tech leaders.

The stock has actually declined the day following the last two quarterly reports (3.5% in Feb and 5.1% Oct) as investors momentarily considered what higher costs might mean for narrow retail profits at a time when competition is getting stiffer for their cash cow, AWS.

To my eye the March breakout level of $850, which happens to be very near the uptrend from the 52-week lows made last April should serve as staunch technical support, and clearly there is no overhead resistance. But the stock’s 10% gains since March 27th, very near all-time highs might discount a bit of good news. But to be clear, the stock has not rallied more than $300 points in the last year to $916 not for investors, and financial media to get to do their $1000 dance. I’m not saying it happens tomorrow, but I suspect we see that print in 2017.


All that said, Wall Street analysts appear to be in a near euphoric state about AMZN’s prospects, with 42 Buy ratings, only 6 Holds and NO SELL ratings with an average 12-month price target of $995. Short interest is very near a 10 year low at just 1.3% of the float.

What to expect? Let’s look no further than RBC’s Mark Mahaney’s 5 critical factors for their Q1 print:

1)Gross margin trends – We estimate Q1 gross margin of 36%, up 100bps Y/Y;

2)Overall Operating margin trends – We are looking for a 2.6% GAAP operating margin in Q1, down 110 bps Y/Y;

3)Key AWS Results – For Q1, we are looking for AWS Revenue of $3.6B, growing 40% Y/Y and AWS GAAP Operating Profit of $835MM (a 23% margin);

4)Key North America Retail Results – We are looking for NA Retail Revenue of $20.3B, growing +19% Y/Y, and NA Retail GAAP operating margin of 3.8%, up 30 bps Y/Y; and

5)Key International Retail Results  – We are looking for International Retail Revenue of $10.7B, growing 19% Y/Y ex-FX, and an International Retail Segment Loss of $700MM.

It’s been a fool’s errand for years to try to pick a long term top. Over the last 10 years, there have been three peak to trough declines of 30% (late 2011 to early 2012, early 2014, and early 2016) all yielded new all-time highs within a year.  While the late 2016 peak to trough decline of 15% was far shallower than the prior three it was greater in market cap terms than the first two, which says just enough about how far they have come in such a short period of time. The stock bottomed near $8 in 2008 and is up nearly 2500% since!


For those that are long AMZN and would need to the stock to be pulled from their cold dead hands, dollar cheap hedges into the event make a ton of sense. For instance:

Hedge vs 100 shares of AMZN (918)

Buy 1 April28th weekly 885 put for $5


Rationale – 1 to 1 protection on your long stock from a breakeven of 880 and below. This targets the implied move level to the downside and protects against any move worse than that. The 50-day moving average is just below 870 and should serve as support, but if it didn’t and the stock got nasty spending just $5 to protect the stock below that makes a ton of sense. The ideal situation is for the stock to be higher.  On a small move lower (with the stock still above 885) this runs the risk of adding $5 in losses alongside stock losses.


For those thinking $1000 is a foregone conclusion, but it seems crazy to buy the stock here for that move,here’s a way to play for that with defined risk:

Bullish targeting $1000

Buy the May 950/1000/1050 call fly for 6.50
  • Buy 1 May 950 call for 11.50
  • Sell 2 May 1000 calls at 2.75 (5.50 total)
  • Buy 1 May 1050 call for .50


Breakeven on May expiration: Profits between 956.50 and 1043.50 with max gain of 43.50 at $1000. Losses of up to 6.50 below 956.50 and above 1043.50.

Rationale – For a fraction of the cost of the stock (in defined risk) one can target a move to $1000 in May and make up to 7 times the amount risked. If the stock goes nowhere or tanks it risks 6.50, but that’s a fraction of the implied move.