Amazon.com Inc. (AMZN US) reports 4th quarter earnings after the bell and the stock is up over $7.50 today, or 0.91%, in anticipation of solid earnings. Analysts are expecting earnings of $1.35/share which would be a 35% bump up from last year’s $1.00/share. Total revenues are expected to come in at $44.7 billion versus $35.7 billion last year, an increase of over 25%.
Analysts are expecting strong growth in holiday e-commerce sales, which were record setting on a street-wide basis, and an increased portion of their revenues to come from their growing cloud business. Other positive footnotes for Amazon is a logistical operation expansion into air cargo transportation and expansion into the e-commerce auto parts segment.
While analysts are predicting strong earnings numbers, option traders are not as effusive. Over the past five years Amazon has averaged an over 8% price move the day after they announced quarterly earnings, but option traders are expecting a move, either positive or negative (unlikely), of just over 5%.
Amazon, like most mega cap stocks, is a large perpetual technical short as it is used as a hedge to the various indexes it is a member of and as a hedge to overall market beta. Over the past five years, Amazon’s average short interest has risen from $1.8 billion in 2011 to an average of $3.9 billion in 2016. Of the $3.9 billion, a large portion of the short interest is used in hedging market, index and sector risk and not outright alpha generation.
Amazon’s 2017 short interest increased by $1.1 billion, or 26%, to $5.3 billion. These quick bursts of short activity in a mega cap security are usually more alpha oriented as hedging strategies grow more slowly as investors usually leg in and out of their hedged positions gradually over time. Amazon short sellers were on the wrong side of the market this January with $4.7 billion of average shorted inventory generating $555 million net of financing mark to market losses. $48 million of those losses were generated by today’s $7.40 price increase.
If Amazon has its usual 8% post-earnings stock price increase, short sellers will add an additional $430 million to their losses, but if the option market is correct it will ”only” add $270 million of losses. We can expect $825 million to $985 million of total mark to market losses in Amazon tomorrow morning. Either way, shorting Amazon stock is a very expensive hedge or a very poor attempt to generate alpha. Or, the $1.1 billion of new January shorts are correct and Amazon reverses some of its January rally.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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