(Note: The author of this fundamental analysis is a financial writer and portfolio manager)
Amazon.com Inc. (AMZN) historically reports its first-quarter results around the last week of April, and with nearly two weeks before that next earnings report, one thing is clear: Options traders are already starting to price in a massive amount of volatility for the stock. The rising levels of increasing volatility come as analysts slash their earnings estimates and raise their revenue outlook. Meanwhile, the stock has already had an incredible 2018, despite being nearly 10% off its highs, the stock is still up almost 21.7% on the year, crushing the S&P 500 by over 24 percentage points.
Amazon's stock has hit a rough patch in recent weeks, along with the broader market, but it has also been the focus of ire from President Donald Trump over the company's use of the U.S. Post Service to deliver its packages. The negative attention has put added pressure on the stock.
High Levels Of Volatility
The long straddle options strategy set to expire May 18 is pricing in a rise or fall of over 10% from the $1,450 strike price, placing the stock in a trading range of $1,300 to $1,600—a massive range of $300—with shares currently trading at $1,440. Meanwhile, the implied volatility for these options is exceptionally high as well, at 41% versus an S&P 500 implied volatility of only 17%. According to data from Trade Alert, the implied volatility term structure shows not only how high levels are currently and over the next 30 days but how the market is seeing lower levels of volatility in the future.
The high levels of implied volatility the options market are now pricing in likely stems from the company's history of focusing more on revenue than on earnings—and a history of unpredictable earnings. The chart below shows how Amazon's earnings results rarely come inline with analysts expectations, while revenue estimates do come closer to views and are far more predictable.
Slashing Earnings Estimates
Perhaps confusing the matter more, analysts have been slashing their outlook for earnings in the first quarter, dropping those estimates to $1.22 from $1.70 a decline of 27%. Meanwhile, these same analysts have been raising their revenue estimates, which now stand at $49.91 billion, up from $48.60 billion, a rise of nearly 3%. With all the estimates changing, analysts haven't slowed down in raising their price targets, with the average price target now at $1,709, an increase of nearly 32% in 2018 alone, from roughly $1,295.
It would seem that for now there is a great deal of uncertainty in the marketplace regarding the direction of the stock in the near term, and while results will likely determine which way the stock goes, it will also help to lower the uncertainty and decrease the high levels of implied volatility.
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.