Amazon.com Inc. (AMZN) will report its fourth quarter results on January 30 after the close of trading. It has been a year of rising cost for the company as it ramped up spending on its social and digital marketing. The rising costs have been one of the contributing reasons why the company has missed analysts' earnings estimates the last two quarters in a row.
Despite the rising cost, some options traders are betting that Amazon’s stock jumps following its quarterly results. Meanwhile, the technical charts are also pointing to higher prices for the shares too. It could suggest that some investors see Amazon’s rising expenses as a thing of the past.
Spending Ramps Up in 2019
Marketing expenses for Amazon rose significantly in 2019. For example, in the third quarter, the company spent nearly $4.8 billion on marketing, up by 43% over the same quarter in 2018. Meanwhile, through the first nine months of 2019, Amazon's marketing expenses climbed by a stunning 43% to $12.7 billion.
But it wasn’t just marketing that Amazon was spending heavily on. Technology and content cost have soared, increasing by around 24% to approximately $26.2 billion for the first three months of 2019. Also, fulfillment costs have increased by almost 17% to $28 billion in the company’s push for one-day shipping.
Amazon's market expense rises sharply.
Options Betting Suggests That Amazon Rises
However, despite these higher costs, some traders appear to be betting that the stock rebounds in the weeks ahead. The open interest for the February 21, 2020, calls at the $1,800 strike price increased by around 2,900 contracts on January 17. According to the data from Trade Alert, the calls traded on the ASK for about $100 per contract. It would suggest a trader was making a bet the stock would rise to $1,900 or higher by the middle of February.
$1800 Call Options For February 21, 2020
Additionally, the open interest for the February 21 $1875 calls rose by around 2,700 open contracts on January 17. These calls also traded on the ASK as well for $53.25 per contract and appear to be a bet that the stock rises above $1,928 by the expiration date.
Amazon $1875 Calls for February 21, 2020
Technical Trends Point To Higher Prices
The technical chart appears to have formed a bullish technical pattern known as a cup and handle. This is a bullish pattern and suggests that the stock rise in the future. Should the shares climb beyond $1,900, the next level of resistance would not come until $1,966, which is about 6% higher than the stock’s price on January 24 of around $1,860.
Overall, the trend from Amazon appears to have turn bullish based on the relative strength index which has been steadily trending higher since the beginning of August. It suggests that momentum is moving into Amazon’s stock and it should rise over the longer-term.
Amazon's technical chart
Earnings Expected To Drop
Analysts are forecasting Amazon’s earnings to have declined by around 32.5% in the fourth quarter to $4.08 per share. Meanwhile, revenue is estimated to have grown by roughly 19% to $86 billion. The company will need to turn the earnings machine on during this quarter for the stock to start moving higher.
Actual earnings versus analysts estimates
In the past, the stock was mostly seen as a revenue growth story and had primarily been given a pass for earnings shortfalls. But as revenue growth has slowed, investors have more regularly looked at Amazon’s earnings growth. Now, with earnings growth in doubt as the company spends to ramp up marketing and technology, one will be left to wonder what levers Amazon will have to pull this quarter to get investors excited again.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.
