(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of V and MA.)
Amazon.com Inc. (AMZN) shares are off to a blistering start in 2018, having risen by nearly 15 percent so far. The sharp rise comes as expectations build for Amazon's fourth-quarter earnings release slated for February 1. Amazon reported that 2017 was one of its most successful holiday seasons to date, prompting investors to prepare for what could be a blow-out earnings report.
Analysts' consensus estimates are looking for revenue in the fourth quarter to have risen by nearly 37 percent to $59.83 billion, while earnings are expected to have climbed by almost 19 percent to $1.83. But to this point, fourth-quarter revenue estimates have only risen fractionally over the past 30 days, which suggest analysts have not caught the same feverish outlook as investors.
The strong holiday season hasn't only helped to boost Amazon shares. The lucrative season has led investors to dream of big results when Amazon reports its results. Even payment processors Visa Inc. (V) and MasterCard Inc. (MC) have benefited from the holiday boost, with shares rising by nearly 10 percent as consumers used credit and debit cards to make online purchases. (See also: Amazon Made Up 4% of All US Retail in 2017: Study.)
Amazon has consistently been inconsistent when it comes to meeting Wall Street expectations when it comes to earnings. The most recent quarters are perfect examples.
Amazon missed Wall Street's second-quarter projections by nearly 72 percent, causing analysts to cut third-quarter estimates from $1.18 to only $0.01 per share. The steep cut enabled Amazon to blow out watered-down 3Q forecasts by nearly $0.50 per share when it reported EPS of $0.52. Where Amazon's fourth-quarter results will come in is anyone's guess.
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Options Market Not As Excited Yet
Interestingly enough, the options market is not looking for nearly the same big move as the equity market. The long straddle options strategy using the $1,350 strike price suggest a rise or fall in Amazon's stock of only 7 percent, by expiration on February 16. Meanwhile, the most active options come all the way up at the $1,400 strike price, with about 1,300 call options open. They have a notional value of roughly $3.7 million, a rather small wager.
The higher Amazon's stock rises ahead of its 4Q results, the harder it will be for the notoriously inconsistent company to exceed them.
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.