To The Moon

I am closely monitoring $Amazon.com(AMZN)$ as it prepares to release its earnings report for the fiscal year ending December 31, 2024, scheduled for February 6, 2025, after market close. This article will delve into Amazon's guidance compared to analysts' forecasts, identify key drivers influencing its performance, assess associated risks and opportunities, and propose two trading strategies with a high probability of profit based on current market conditions.

Financial Projections and Analyst Expectations

Amazon has provided guidance for fourth-quarter net sales between $181.5 billion and $188.5 billion, indicating a year-over-year growth of 7% to 11%. Analysts are optimistic, with consensus estimates pointing toward revenue of approximately $187.3 billion and earnings per share (EPS) of $1.49, reflecting a 48% increase from the prior year.

The company's operating income is projected to reach $19 billion for Q4, underscoring its robust profitability.

Alphabet's Miss and Its Impact on Amazon

Alphabet (GOOGL) just reported disappointing Q4 earnings, missing revenue estimates and sending its stock down 7%. While its core search-advertising business performed well, Google Cloud revenue fell short of expectations. Additionally, Alphabet’s guidance included $75 billion in capital spending for 2025, significantly higher than Wall Street anticipated, raising concerns about cloud profitability and competitive pressures—especially from emerging AI-driven players like DeepSeek.

Amazon’s AWS division will now be under even greater scrutiny when it reports earnings. AWS is expected to show solid growth, but if its performance mirrors Alphabet’s cloud slowdown, investor sentiment on AMZN could turn negative. However, if AWS beats expectations, Amazon could stand out as a winner in the cloud space, making its 7% stock decline an attractive buying opportunity for long-term investors.

Key Performance Drivers

Positive Drivers

1. Amazon Web Services (AWS) Growth: AWS continues to be a significant revenue generator, with anticipated growth of 19.3% in Q4. The increasing demand for cloud services positions AWS as a central component of Amazon's expansion strategy.

2. Advertising Revenue Expansion: Amazon's advertising segment has experienced substantial growth, contributing positively to its revenue diversification and profit margins.

3. E-commerce Resilience: Despite global economic uncertainties, Amazon's e-commerce platform has maintained strong performance, driven by its extensive product offerings and efficient delivery network.

Negative Drivers

1. Capital Expenditures and Profitability Concerns: Alphabet's massive $75 billion spending plan has already rattled investors, and Amazon is also making significant infrastructure investments, including Project Kuiper and AWS data centre expansions. If AMZN’s capex forecasts come in higher than expected, the stock could see further downside pressure as profitability concerns grow.

2. Competitive Pressures in Cloud and AI: The emergence of competitors, especially in AI-driven cloud computing, poses challenges. Google Cloud’s miss suggests that corporate customers may be slowing spending on cloud services, which could impact AWS growth. Additionally, the rise of Chinese AI startup DeepSeek signals increased competition in AI-powered cloud solutions.

Risks and Opportunities

Tariff Implications

Recent policy changes, including the imposition of a 10% tariff on Chinese imports and the elimination of the de minimis rule (which previously allowed duty-free imports of goods valued under $800), are expected to impact the e-commerce landscape. Companies like Shein and Temu, which relied on these exemptions, may face increased costs, potentially benefiting Amazon by reducing competition from low-cost international sellers.

AI and Technological Advancements

Amazon's substantial investments in AI and cloud infrastructure, particularly through AWS, position it to capitalize on the growing demand for advanced technological solutions. However, the rapid development of AI technologies by competitors could necessitate further investment to maintain market leadership.

Trading Ideas

Based on the current analysis, the following are two trading ideas for AMZN:

1. Bull Call Spread (Moderate Risk, Limited Profit Potential)

Objective: To capitalize on a moderate increase in AMZN's stock price following the earnings report.

Strategy:

• Buy one AMZN April 18, 2025, $250 call option.

• Sell one AMZN April 18, 2025, $260 call option.

Rationale: This strategy involves purchasing a call option at a lower strike price while selling another call option at a higher strike price with the same expiration date. The bull call spread limits both potential gains and losses, making it suitable for investors anticipating a moderate increase in AMZN's stock price.

Potential Outcomes:

• Maximum Profit: Achieved if AMZN's stock price is at or above $260 at expiration, resulting in a profit equal to the difference between the strike prices minus the net premium paid.

• Maximum Loss: Limited to the net premium paid for the spread, occurring if AMZN's stock price is at or below $250 at expiration.

2. Cash-Secured Put (Conservative Income Strategy)

Objective: To generate income with the possibility of acquiring AMZN shares at a lower price.

Strategy:

• Sell one AMZN April 18, 2025, $230 put option.

• Collateral: Maintain sufficient cash to purchase 100 shares of AMZN at the strike price if assigned.

Rationale: Selling a cash-secured put allows investors to collect premium income while obligating them to purchase AMZN shares at the strike price if the option is exercised. This strategy is ideal for investors willing to own AMZN stock at a potentially lower cost basis.

Potential Outcomes:

• Maximum Profit: The premium received from selling the put option, realized if AMZN's stock price remains above $230 at expiration.

• Maximum Loss: Occurs if AMZN's stock price falls significantly below $230, resulting in a purchase of the shares at the strike price, leading to a paper loss offset by the premium received.

Conclusion

Amazon’s upcoming earnings report has become even more critical following Alphabet’s cloud-related miss. While AWS remains Amazon’s crown jewel, slowing enterprise cloud spending and heightened competition from AI-driven startups could pressure revenue growth. On the other hand, a strong AWS performance relative to Google Cloud could differentiate AMZN as the industry leader, creating a buying opportunity after its 7% drop.

For investors with a bullish outlook, the bull call spread offers a cost-effective way to capitalize on a potential earnings-driven rebound. Meanwhile, the cash-secured put strategy provides a conservative income stream while allowing for stock accumulation at a lower cost.

With a well-balanced approach, investors can navigate Amazon’s earnings with confidence, balancing upside potential with risk management. Will AWS deliver where Google Cloud failed? We’ll find out on February 6.

Please DYODD.