Amazon.com Inc. (AMZN: sentiment, chart, options) has shrugged off some negative comments from a brokerage firm. The online retailer is expected to post tighter profits and revenue growth when it reports fourth-quarter results next week.
"We believe that management will not deviate from its strategy of share gains via lower prices during the downturn, which should weigh on gross margins," Jim Friedland of Cowen & Co. wrote in a Jan. 16 report.
However, one thing to keep in mind is that the recession has hit retailers hard, leading analysts to believe that AMZN likely had to cut prices and eat into profits to keep the traffic flowing during the period.
The online retailer is slated to report fourth-quarter earnings after the close on Jan. 29. Wall Street is forecasting a profit of $6.5 billion, 15% above revenue for the same period the previous year, while earnings are expected at 40 cents per share, which is down from 48 cents a share last year.
Gross margins remain a major concern. Stephen Ju of RBC Capital Markets said his checks with merchants who supply Amazon suggest that gross margins may have been compressed by as much as 200 basis points during the quarter, as Amazon pushed them for lower prices. "As Amazon employed similar discounting tactics on its owned-and-operated merchandise to drive traffic, we believe gross margin could be negatively impacted," he wrote in a report.
The shares of AMZN are up 1.6% this afternoon as the security remains locked in its sideways channel. The equity dropped from its August 2008 peak of $91.75 to its November 2008 low of $34.68, resulting in a loss of more than 62%. The security has since rebounded from this low and sidled along support at its 10-week moving average at the 48 level during the past 7 weeks.
From a sentiment perspective, investors are less than optimistic about the stock's prospects. Short sellers have flocked to this security, pushing the number of shorted shares up to 32.3 million. This buildup of bearish bets accounts for nearly 10% of the company's float. What's more, this accumulation of bearish bets is 5.5 times the stock's average daily trading volume. An unwinding of these pessimistic positions on some positive news from the firm could add some lift to the shares.
Wall Street also has its doubts about the online retailer. According to the latest data from Zacks, the stock has earned 5 "strong buy" ratings, 12 "holds," and 3 "sells." Any upgrades from this dour bunch could increase the buying pressure on the shares.
Meanwhile, options players are slowly growing more skeptical of the shares. The Schaeffer's put/call open interest ratio for AMZN stands in the middle of its annual range at 1.27. However, put trading has picked up on the International Securities Exchange (ISE). During the past 10 trading days, an average of 2.07 puts have been purchased to open for every 1 call purchased to open. This ratio of puts to calls is higher than 81.5% of all those taken during the past 52 weeks.
Overall, traders should pay close attention to the company's earnings report. A positive report could help spur the shares out of their current trading range as the bevy of bears unload their short positions.
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