(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Amazon.com Inc. (AMZN) shares fell about 2.5 percent after the company’s second-quarter EPS came in 71 percent lower than estimated by analysts, at $0.40, while revenue beat estimates by 2 percent, at $37.96 billion. The large EPS miss hardly led to a significant drop in a stock that is up nearly 36 percent year-to-date, still beating the S&P 500 by 26 percentage points. Surprisingly, the big EPS “miss” had little, if any, impact on the stock. It was merely the expectations going into the event that was too high.
From that perspective, any pullback in Amazon shares is likely to be short-lived. The muted decline could even be a warning to those expecting a sharp decrease. If the current quarterly “miss” could not get shares lower, it will take something far worse to get Amazon stock to plunge substantially lower.
From July 14 through July 26, Amazon shares rose by just over 5 percent, while the Technology Select Sector SPDR ETF (XLK) was up just 1.50 percent, and the S&P 500 was up only 75 bps.
The company reported second-quarter earnings after the market close on July 27. Going into that report, the stock fell in conjunction with the broader overall Nasdaq. But even with the big pullback, the stock was still up nearly 4.50 percent during the period.
The stock has downside risk to around the $980 level, where it would run into its first supporting trendline.
With the stock price rising into the event, we can measure the numbers of bets placed going into the earnings release as another barometer. For that, we can turn to open interest in the options market.
On July 14, Amazon closed at a price of $1,001, while the largest open interest for the options in the month of August was at the $1,000 strike, at with roughly 6,000 contracts of both puts and calls open. The second-highest open interest was the $900 strike price, with 3,400.
By July 24, that shifted, with nearly 7,700 contracts open at the $1,000 strike price. The second-highest total was at the $1,030 strike price, with 4,200 contracts open, with the stock closing at $1,038.
By July 27, with the stock closing at $1,046, there were about 8,100 options open at the $1,000 strike price, and nearly 5,500 contracts open at $1,030. Interestingly, the $900 strike price only increased by 900 contracts since July 14. It wasn’t just the $900 strike price options that didn’t see a big rise in open interest; the $950 and the $990 saw the same.
Since the cost to buy calls at levels below the stock’s current price would have been too expensive, any increase in open interest below the stock’s $1,000 strike price would likely be put buying, betting the stock would fall. The option strategy would probably have revolved around buying calls and selling puts, which are bullish bets, and would likely mean investors were looking for a sharp rise in Amazon following its earnings release.
The market was set up for the stock to pop higher as evidence of the stock price’s above-average performance and the options market betting. The stock probably didn’t fall because the results were bad. The stock fell because the numbers just weren’t as strong as the market had hoped.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. 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. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.
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