To Trade or Not to Trade: An Amazon.com Whisper Number and Earnings Preview

Jul.22.11 | About: Amazon.com, Inc. (AMZN)

Amazon.com (NASDAQ:AMZN) reports fiscal second quarter earnings on Tuesday, July 26th, after the market close. The whisper number is $0.36, two cents ahead of the analysts estimates. Amazon has exceeded the whisper number in 23 of the 49 earnings reports for which we have data.

Trading on an earnings event requires an understanding of post earnings price movement, both after hours and intra-day. We'll take a look at the average post earnings price movement, when those moves occur, and if Amazon presents an earnings trade opportunity.

Since Amazon reports earnings after the market close, it's important to look at after hours trading activity. Over the past four quarters the average price move in after hours trading following its earnings reports is -5.0%, a strong and negative price move. In other words if you took a long position prior to the past four earnings reports you were on the right side of the trade in only one out of four trades (and that only yielded an overnight gain of 0.5%).

The average price move during next available intra-day trading (market open to market close) for the past four quarters is +5.9%. A very strong and positive price move. The average price move within five trading days for the past four quarters following its earnings reports is +5.7%. A very strong and positive price move.

Longer term earnings analysis (last four years of earnings) shows the company tends to see (on average) price movement of +3.9% (intra-day) in one trading day following its earnings report, and price movement of +2.7% in five trading days.

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Amazon has topped the whisper number in only one of the past four quarters, but short term it has lacked a consistent price reaction. In other words, beating the whisper number doesn't always translate to price strength (at least not over the past four quarters). But take a look at the table below:

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When considering all quarters for which we have a whisper number, Amazon has seen a consistent intra-day price reaction to beating or missing the whisper number. The average 30-day price reaction for the 23 quarters that Amazon has topped the whisper shows an average price move of +8.8%. And for the 23 quarters it has missed the whisper number, an average price move of -3.9% in 10 trading days following earnings.

Other factors that may influence post earnings price movement;

The majority of investors polled are expecting the company to provide a positive outlook:

  • Positive - 57.1%
  • Neutral - 28.6%
  • Negative - 14.3%

Amazon has a 47% positive surprise history (having topped the whisper in 23 of the 49 earnings reports for which we have data).

  • Beat whisper: 23 qtrs
  • Met whisper: 3 qtrs
  • Missed whisper: 23 qtrs

Summary: Over the past four quarters Amazon earnings have fallen short of the whisper number in three out of four reports. The average price movement (after hours) is strong but negative. The average price movement (post earnings intra-day, long or short term analysis) is strong and positive. There is no short term consistent reaction to the whisper number, but there is a long term consistent reaction. Investors are showing some confidence for next quarter's outlook. This could play against them if they fail to provide positive forward looking guidance.

Data indicate that any long trade should not be taken prior to the earnings report, but at open (intra-day) the following day. Data indicate the strongest price movement (when beating the whisper number) within 30 trading days following the earnings report, and when falling short of the whisper number within five to 10 trading days. The data certainly provides many positives here (both long and short), but all come with a certain risk. For most, and with the right trade for the right situation, the positives outweigh the negatives and data indicate Amazon does present a viable short term trading opportunity.

When analyzing the data we collect, the most important aspects are how a company reacts to beating or missing the whisper number, the average post earnings price movement, and in what timeframe (see link in profile to receive alerts). Keep in mind that trading on whispers is a technical play on market psychology, rather than a bet on a company's fundamental strengths.

A company's "reaction" to the whisper number expectation is the key - on average companies that exceed the whisper are "rewarded," while companies that miss are "punished" following an earnings report.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.