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Tech Giants AMZN and MSFT Report Earnings After Thursday’s Close

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April 25, 2018
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Tech giants (AMZN) and Microsoft (MSFT) both report earnings after market close on Thursday, Apr. 26. Both stocks have pulled back a bit from their recent all-time highs hit in mid-March, however, they’re still up substantially looking back to the start of 2017.

There have been quite a few companies this earnings season that have topped analysts’ estimates, but some of the stocks are still getting hammered despite solid results. These next few weeks could be an important stretch for tech as the biggest companies in the sector, still trading not too far from all-time highs, have reports coming up.

Amazon Earnings and Options Activity

For Q1, AMZN is expected to report adjusted EPS of $1.22 on revenue of $50.2 billion, according to third-party consensus estimates. In the same period a year ago, the company reported adjusted EPS of $1.48 on revenue of $35.7 billion.

In his letter to shareholders last week, CEO Jeff Bezos revealed that the company has over 100 million Amazon Prime members globally. For all of 2017, AMZN generated $9.7 billion in net sales from subscription services, according to company reports. Subscription services include Prime memberships, as well as audiobook, digital video, digital music and other subscription services the company offers.

Over the years, AMZN has continued to look for ways to evolve its Prime membership. In fall 2017, it rolled out an in-home delivery service that allowed packages to be dropped off in your home when you aren’t there using a combination of smart locks and surveillance systems. And it just announced it would roll out a similar service allowing packages to be delivered to the trunks of General Motors and Volvo vehicles.

In addition to subscription services, another important part of AMZN’s business is Amazon Web Services, or AWS, which generated a majority of its profit in 2017. In Q4 2017, AWS’ net sales increased 45% year-over-year to $5.11 billion and the division generated $1.35 billion in operating income.

In recent quarters, the company has been rolling out more AI products and services on AWS. AMZN has also been expanding AWS’ infrastructure and said it plans to open 12 more availability zones across four regions by early 2019.  

Amazon stock chart in 2018

AMAZON SINCE START OF 2018.

So far in 2018, AMZN has continued to outperform the S&P 500 (SPX, teal line) and the Nasdaq 100 (NDX, purple line). Year-to-date returns as a percentage is shown on the right hand side of the chart. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around the upcoming earnings release, options traders have priced in about a 5.9% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was on the high end at the 89th percentile as of this morning.

In short-term trading at the Apr. 27 weekly expiration, calls have been active at the 1430 and 1440 strike prices, while puts have been active at the 1400 strike. At the May 18 monthly expiration, recent trading has been heavier at the 1450 and 1500-strike calls and the 1400-strike put.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Microsoft Earnings and Options Activity

For its fiscal Q3 results, MSFT is expected to report adjusted EPS of $0.85 on revenue of $25.7 billion, according to third-party consensus estimates. In fiscal Q3 2017, MSFT reported adjusted EPS of $0.73 on revenue of $23.6 billion.

As the driver of much of its recent growth, MSFT’s cloud businesses have been a consistent focus among analysts and investors. Here are a couple of highlights from its most recent report:

  • Revenue in productivity and business processes increased 25% year-over-year to $9 billion. Within this segment, Office 365 commercial and Dynamics 365, two of its cloud-based products,  saw the fastest revenue growth, up 41% and 67% year-over-year, respectively.
  • Intelligent Cloud revenue increased 15% year-over-year to $7.8 billion. Within this segment, revenue from Microsoft Azure, which provides cloud-computing services, was up 98% year-over-year.
  • “More Personal Computing”, which includes gaming, hardware products, search advertising revenue and other categories, remained MSFT’s largest division by revenue, although it was its slowest growing segment. Revenue in was up 2% year-over-year to $12.2 billion.

Again, analysts are widely expecting MSFT’s revenue growth in fiscal Q3 to be driven by Office 365, Dynamics 365 and Azure. Many analysts are expecting Azure revenue growth to decelerate, although their estimates vary from 80% to 95% year-over-year growth for that division. 

Microsoft stock chart in 2018

MICROSOFT SINCE START OF 2018.

MSFT has hit the low-$97 mark several times this year, but so far it hasn’t been able to sustain a breakthrough much higher. Its all-time high was $97.24 hit on Mar. 13. Since then, there have been a couple of larger swings in the stock. It hit the low-$97 mark again in mid-April and after a recent pullback has been trading in the lower-$90s range. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around the upcoming earnings release, options traders have priced in a 4% stock move in either direction, according to the Market Maker Move indicator. Implied volatility was at the 83rd percentile as of this morning.

In short-term trading at the Apr. 27 weekly expiration, calls have been active at the 94.5 and 95 strike prices, while volume has been a bit lighter on the put side and concentrated at the 90 strike. At the May 4 weekly expiration, open interest is significantly higher at the 94 and 96.5-strike calls, and the 87.5 and 90-strike puts.

Further out at the May 18 monthly expiration, the 93-strike call has been more active, with volume of over 9,000 contracts so far in today’s session. Volume on the put side has been lighter so far today.

What’s Coming Up

Earnings grab most of the headlines this week but don’t forget to watch Friday for the government’s first read on Q1 gross domestic product. The report is due out before the opening bell and could give investors a sense of whether the economy continued its solid run that started in Q2 of last year.

There are also several central bank meetings coming up to consider keeping an eye on. The European Central Bank has been removing some stimulus and meets again this week, providing an update Thursday morning. Bank of Japan (BOJ) is also holding a meeting at the end of the week, although BOJ governors have been a little more cautious with their monetary approach. The Fed will hold its next meeting on May 1-2.

For a look at what else is going on, check out today’s market update.

Good Trading,
JJ
@TDAJJKinahan

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