Amazon Earnings Beat On Profit – Short Sellers Are Being Squeezed Out

Amazon was responsible for 43 per cent of all U.S. e-commerce sales in 2016. This resulted a hard start of the year for short sellers.

Last month online retail giant Amazon announced that fourth quarter revenues exceed $43.7 billion and the company earns $1.54 per share.

Among the business highlights that Amazon emphasized were the following:

  • Tens of thousands of developers are using the Alexa Voice Service to integrate Alexa into their products, including Dish DVRs, Ford and Volkswagen vehicles, GE C Lamp, Huawei Mate 9, LG Smart Instaview fridge and Whirlpool appliances.
  • Alexa-enabled devices were the top-selling products across all categories on this holiday season. Customers purchased and gifted a record-setting number of devices from the Amazon Echo family, with sales up over 9x compared to last holiday season.
  • Third-party developers released more than 4,000 new Alexa Skills since October, including ADT, AT&T, CBS, Pizza Hut and The Wall Street Journal. Tens of thousands of developers are building skills for Alexa.
  • Investment research firm Consumer Intelligence Research Partners (CIRP) estimated that there are more than 8 million US homes with Amazon Alexa (Echo) devices. There are also more than 7,000 skills (voice apps) to date.
  • Amazon introduced Amazon Go in Seattle, a new kind of store with no checkout required. With Just Walk Out Shopping, customers simply take the products they want, and go. Our checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning. 
  • In 2016, the U.S. Prime program added Prime Reading, Twitch Prime, Audible Channels for Prime, and the Prime Photo Family Vault as new Prime-exclusive digital benefits. 
  • Prime members engaged with the Prime digital benefits at a voracious rate, more than doubling the number of video, music, and reading activities compared to 2015. 
  • Amazon introduced Prime Video to customers in more than 200 countries and territories around the globe, giving customers access to unlimited streaming of Amazon’s popular and award-winning Original Series, including The Grand Tour, The Man in the High Castle, and Transparent, as well as popular Hollywood movies and TV shows. Prime Video is now automatically available at no additional cost to Amazon Prime members in Belgium, Canada, France, India, Italy, and Spain.
  • Amazon announced six renewable energy projects during the quarter, including Amazon Wind Farm U.S. Central 2 in Ohio and five new solar farms across the Commonwealth of Virginia, which supports the development of an additional 369 megawatts of renewable energy.
  • With millions of active customers, AWS continues to grow, and enterprise customers have committed to migrating tens of thousands of applications to AWS, including: Workday selected AWS as its preferred public cloud infrastructure provider for customer production workloads; Capital One selected AWS as its predominant cloud infrastructure provider; shipping carrier Matson has closed all of its data centers, completing an “all-in” migration to AWS and McDonald’s is transforming its digital-facing properties with AWS.

While Amazon achievements and earnings have surpassed expectations, the fourth quarter Amazon income was less than expected — only $749 million. These numbers gave confidence to investors and gave hard time to short sellers.

According to Head of Research at financial analytics firm “S3 Partners” Ihor Dusaniwsky, betting against Amazon is not a surprise. He pointed out that a large part of that is because of hedging. He claims that when it comes to big companies like Amazon, such blasts are more “alpha oriented as hedging strategies grow more slowly as investors usually leg in and out of their hedged positions gradually over time.”

Despite the fact that short sellers had a difficult month to start the year, Mr Dusaniwsky estimates that $4.7 billion of average shorted inventory generating $555 million net of financing mark to market losses.

If Amazon has its usual 8 per cent post earnings stock price increase, short sellers will lose additional $430 million, but if the option market is correct it will only add $270 million of losses. “We can expect $825 million to $985 million of total mark to market losses in Amazon tomorrow morning,” said the Head of Research at “S3 Partners”, Ihor Dusaniwsky.

One selloff will not solve all sellers’ problems. As Mr Dusaniwsky says, in general Amazon stock is “a very expensive hedge or a very poor attempt to generate alpha. Or, the $1.1 billion of new January shorts are correct and Amazon reverses some of its January rally.”

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