Since the March 23 lows, the shares of Amazon.com Inc. (AMZN) have surged by a stunning 57%, easily beating the S&P 500's gain of about 43%. Over that time, the market cap has soared by approximately $550 billion to around $1.5 trillion. But, with earnings on July 30, some investors are betting that Amazon's hot streak cools, and the stock declines.
The global pandemic has put Amazon in an advantageous position due to the shift from traditional shopping to eCommerce, as consumers sheltered in place. It has led to massive expectations among investors as revenue estimates have lifted dramatically since the end of the first quarter.
Amazon vs. S&P 500
Placing Bearish Bets
Not everyone is optimistic; recently, a bearish options trade was made for expiration on August 21 using the $3,100 strike price puts and calls. The open interest levels rose on July 15 by roughly 2,900 contracts for the calls and about 2,700 contracts for the puts. The calls were sold on the BID between $196 and $199, the puts were bought on the ASK between $262 to $267. It appears to have created a bearish put spread, where the trader had a total outlay of about $70 per contract. It means the stock would need to stay below $3,030 or lower to earn a profit on the trade.
Technical Reversal
After peaking around $3,350 on July 14, the stock has pulled back. The technical patterns do suggest the stock has further to fall in the weeks ahead. Currently, the chart illustrates a bump and run, a bearish reversal pattern. It would suggest that the stock continues its recent decline to around $2,800. Should the stock fall below that price, it could drop further, perhaps to as low as $2,450.
The relative strength index had been trending higher, and recently that uptrend has broken. It suggests that bullish momentum is turning bearish and that Amazon may face further declines.
Amazon - Bump and run pattern
Expectations Soar
Due to the pandemic, Amazon has seen a significant uptick in its business, resulting in the company delivering better than expected first quarter revenue and beating analysts' estimates by 2.5%. The strong results have led analysts to boost their forecast for the second quarter. Analysts estimate the company will have had growth of 27.5% versus the same period a year ago, rising to $80.8 billion, from prior forecasts for revenue of roughly $73 billion on April 13.
Amazon 2Q revenue estimates
However, it is not all rosy for Amazon. The company has seen costs rise during this time. Amazon's first quarter earnings missed analysts' estimates by 19.8%, and that prompted analysts to slash their earnings estimates for the second quarter. Currently, forecasts call for earnings to have plunged by 74.3% to $1.34 per share. That is down from prior estimates of $6.06 per share in the middle of April.
Consistently Inconsistent
But trying to predict Amazon’s earnings has never been easy, the company has been known to beat or miss estimates by wide margins on numerous occasions over the years. For example, analysts had been anticipating earnings of $4.03 in the fourth quarter of 2019; instead, the company posted earnings of $6.47, nearly 61% better. Just the quarter prior, estimates were for $4.62, but results came in about 8.5% below estimates.
If anything, Amazon has been consistently inconsistent when it comes to reporting results. It makes betting for or against the company incredibly tricky. This quarter is likely to be no different.
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.
