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Summary

  • Since 2013, fading the Amazon.com's post-earning open has been the better trade than buying it.
  • The change in behavior could reflect a somewhat subtle downgrade in investor sentiment toward Amazon's unprofitable surge in sales.
  • The July post-earnings behavior is on track to maintain the recent bearish streak.

It is looking like the character of the Amazon.com (NASDAQ:AMZN) post-earnings trade has fundamentally changed…and this might reflect a somewhat subtle switch from a bullish to a bearish bias on Amazon.com's stock.

From 2009 to 2012, AMZN very reliably bounced from its post-earnings open almost no matter how far up or down it gapped from the previous day's close. Nowadays, IF AMZN rallies from its post-earnings open, the gains disappear quickly. Within the two weeks following earnings, the stock tends to record a post-earnings loss at some point. The immediate implication is that it is making more sense to fade AMZN post-earnings than to buy it. Here are the results of the post-earnings trade for AMZN since 2009 (also posted as a Google spreadsheet for reference):

Specifically, since the January, 2013 earnings fading AMZN at the open delivered at least a 6-7% return within two weeks 4 out of 6 tries. The other two attempts provided at least one opportunity to exit flat. This is quite a dramatic change in fortunes for the post-earnings trade for AMZN. As I explained in an earlier post, I observed a renewed sense of bullishness after AMZN soared 10 points following its post-earnings open last week.

As I have done in recent post-earnings cycles, I bought call options and shares with the intent of quickly flipping the call options. This cycle, the call options were so profitable I felt emboldened enough to reload on the subsequent dip. With Friday's close, AMZN is now DOWN 5% from its post-earnings open, quite in line with its new pattern. I have duly noted this change in behavior: ahead of October earnings, I will be adding a bearish component to the post-earnings trade for Amazon.com. Perhaps there is even a pattern now to pick up PRE-earnings.

(click to enlarge)Amazon.com (<a href=

Amazon.com seems ready to retest is 2013 breakout point
Source: FreeStockCharts.com

The post-earnings reactions for AMZN have been particularly poor in 2014. Each one has featured a gap down. Post-earnings recoveries took roughly three weeks to develop. I will be watching for similar behavior this time around with a keen eye on the support level shown in the above chart. In the meantime, it is helpful to note that a likely driver of the poor post-earnings reactions is the persistence of losses despite large sales gains. It might even be fair to ask whether AMZN could actually record impressive sales gains once it refocuses on making profits.

In the last earnings report, AMZN posted a year-over-year expansion in its net loss while recording tremendous sales gains:

"Net sales increased 23% to $19.34 billion in the second quarter, compared with $15.70 billion in second quarter 2013. Excluding the $237 million favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales grew 22% compared with second quarter 2013.

Operating loss was $15 million in the second quarter, compared with operating income of $79 million in second quarter 2013. The favorable impact from year-over-year changes in foreign exchange rates throughout the quarter on operating loss was $31 million.

Net loss was $126 million in the second quarter, or $0.27 per diluted share, compared with net loss of $7 million, or $0.02 per diluted share, in second quarter 2013."

Despite the losses, AMZN has been able to increase the cash on its balance sheet year-over-year from $4.5B to $5.1B. This is reflected in its ability to generate positive operating and free cash flows:

"Operating cash flow increased 18% to $5.33 billion for the trailing twelve months, compared with $4.53 billion for the trailing twelve months ended June 30, 2013. Free cash flow increased to $1.04 billion for the trailing twelve months, compared with $265 million for the trailing twelve months ended June 30, 2013. Free cash flow for the trailing twelve months ended June 30, 2013, includes cash outflows for purchases of corporate office space and property in Seattle, Washington, of $1.4 billion."

The chart below shows AMZN's sales versus net margin (net income divided by sales). The trajectory for sales has notably steepened since profitably began its post-recession plunge.

Amazon.com Annual Sales Vs. Total Net Income As A Percent of Sales (Net Margin)

Source: MSN Money

Amazon's guidance for the third quarter suggest that 2014 will be another year of large sales gains and persistent losses:

"Net sales are expected to be between $19.7 billion and $21.5 billion, or to grow between 15% and 26% compared with third quarter 2013. Operating loss is expected to be between $810 million and $410 million, compared to $25 million in third quarter 2013. This guidance includes approximately $410 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions, investments, restructurings, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates."

Based on the stock's performance in 2014, the clock may finally be ticking on investor patience with this kind of news.

Be careful out there!

Source: A Bearish Change In The Amazon.com Post-Earnings Trade

Additional disclosure: Long AMZN shares and call options (see article for caveat on these positions)