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I can’t remember the last time I wrote about Amazon (AMZN), good or bad.
However, I couldn’t help myself when I scanned the top 100 unusually active put options two hours into Thursday trading. The e-commerce giant even had put in the top 10.
So, before I consider the best of my four choices, I need to revisit Amazon’s business and where it sits in relation to its share price. Is AMZN a buy a few pennies under $118? First, let’s consider the arguments for and against.
It’s Still a Darn Good Business
Although most of us in the media describe it as an e-commerce company when discussing Amazon, it is much more. My Barchart.com colleague, Aditya Raghunath, conveniently discussed Amazon in an article today, so I’ll try to glean some arguments from her analysis.
His bull case for the stock is quite compelling.
“Amazon is a market leader in several business segments. For example, it is the undisputed leader in online sales, the largest public cloud infrastructure company, the third-largest digital ad platform, and one of the biggest streaming platforms globally,” Raghunath stated.
Of those, the company’s Amazon Web Services (AWS) cloud business generates the lion’s share of Amazon’s profits. In Q1 2023, it generated $5.12 billion in operating income, accounting for 107% of the company’s operating income overall.
Wait, what? The North American segment made a small operating profit of $898 million in the quarter, offset by a $1.25 billion operating loss internationally, leading to a percentage greater than 100%.
What’s important to glean from its non-AWS operating loss is that the operating margin improved by 258 basis points in the first quarter on the back of an 8.2% increase in revenue.
So, it’s clear the company’s found some savings in its e-commerce operations. That’s a very big positive.
The other positive highlighted by my colleague is Amazon’s digital ad business. In 2022, its ad revenues grew by 25% over 2021 to $31 billion. Data from Insider Intelligence showed that Amazon had a 7.3% worldwide market share, putting it in the fourth spot behind only Google (28.8%), Facebook (11.4%), and Instagram (9.1%).
Sure, it’s got a long way to go to catch the two leaders, but it continues to cut the lead each quarter. More importantly, the ad business is highly profitable, with margins AWS would love to generate. According to Axios, its ad business’s operating margins are north of 50%, meaning it generates as much profit from ads on less revenue than AWS.
There’s a lot to like about Amazon.
What’s Not to Like?
Amazon's biggest fly in the ointment would be its slowing AWS revenue. Although it was 16% higher year-over-year in the first quarter to $21.4 billion, that’s the slowest YOY growth since it broke out the unit’s revenues and profits in 2014.
Worse still, Amazon said that April AWS revenue also slowed, a sign that companies might be cutting back on cloud spending, or worse, it’s losing market share. Unfortunately, we won’t know the answer to this problem for several quarters.
The big focus for analysts is what Amazon plans to do with artificial intelligence and, by extension, its integration with AWS. CEO Andy Jassy said during the Q1 2023 conference call that AWS should be able to use generative AI and large-language models to help its customers strengthen their technologies.
I think it’s fair to say that the company will use AI in any way possible to drive growth. But, in the meantime, it will continue to nibble on its cost structure to push more to the bottom line. According to Bloomberg, the company’s 8.7% increase in operating expenses in Q1 2023 was the lowest in a decade. So, it is doing a reasonable job controlling costs, which is necessary until it can find another growth driver.
Overall, it’s easy to see why analysts give it a Strong Buy (4.82 out of 5) with a mean target price of $142.16, 22% higher than its current share price.
The Option Play
As I said in the intro, four puts are in the top 100 for unusual options activity. Three expire on May 26, with the fourth a week later on June 2. Based on the current price of $117.14, if you sold any of these, you’d be close to having them put to you, but there are still 8-15 days left to decide what happens.
Relative to its price in 2021, AMZN is reasonably priced at the moment. However, where it started the year was undoubtedly a much lower entry point. Overall, AMZN stock spent 28 months -- May 2020 to September 2022 -- at or above its current share price, so it wouldn’t be the worst situation in the world if you were forced to buy between $115 and $117.
So, the put I like of the four is the $116 strike expiring in early June. If put to you, the net price paid would be $114.05, 2.6% below its current share price.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
