OptionsPlay Blog

As I write this, Amazon is trading at $323, down 10% from yesterday’s close due to its earnings report. Our trend indicators have turned bearish and the stock has broken below support at $340. However, we were trading at this level just one week ago, so it’s worth examining the report to help determine our future outlook.

In my opinion, the most important news on the report is that revenue increased by 23% compared to the same quarter last year. The figure that sparked the selloff was the 27% expansion in expenses. But this shouldn’t be a surprise to any Amazon investor. Jeff Bezos is renowned for spending profits to grow his company faster and into more areas than any of his competitors. This is why the stock has been trading at absurd earnings multiples for years. There are astronomical expectations for his company to deliver future profits.

But it seems some investors have grown tired of waiting. I must concur. Jeff Bezos just getting started in the hardware business, just dipped his toes into the phone business, and he’s proven to stick with products even if they aren’t a hit right away. The classic example is the Kindle. Coldly received at first, Bezos’ answer was to cut costs relentlessly and sell it at near zero margins.

The rest is history. But that bet could just have easily went the other way, had eBook readers not soared in popularity. Amazon Cloud has come under fire recently as Microsoft and Google have become more competitive in the space. Amazon Prime is a jack-of-all-trades but really a master at none. Netflix, Spotify, and Asus all are competitive in price and offer better products. Bezos is staring down a rabbit hole: What worked for the Kindle, in the face of much stronger competition, may not (and realistically will not) apply here.

To appease investors, Jeff Bezos must address how he plans to deal with a more competitive landscape. Perhaps a selloff or two will compel the realization that Amazon cannot become a dominate player in every space it treads. Facebook is managing this reality very well. It is time for Bezos to do the same. If not, he will lose investors very quickly.

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– Tony Zhang