Regulators Eyeing Amazon's Whole Foods Acquisition

Amazon.com, Inc. AMZN reports second-quarter earnings on Thursday, July 27 after market close. The company has had a lot going on recently between Prime Day, new product and service launches, and its proposed acquisition of Whole Foods Market, Inc. WFM.

The third annual Prime Day happened earlier in July, and Amazon reported that sales increased 60% compared to 2016 and surpassed the company’s Black Friday and Cyber Monday sales. Prime Day has become just one of the many ways Amazon encourages people to sign up for a Prime membership.

While Amazon doesn’t break out how many members there are, many analysts estimate that there are somewhere around 90 million subscribers globally. In addition to the current benefits the membership offers, the company has continued to roll out more services that might potentially attract more members.

At the end of June, Amazon launched Prime Wardrobe, which is similar to other fashion subscription services. The service allows Prime members to choose an assortment of items, try them on at home, and then pay for what they decide to keep. It’s just one of many services the company has made available to its Prime members over the past several quarters. 

Amazon Spark just launched last week, which it describes as “a place to discover things from people who share your interest.” Anybody can use the service to discover items available for purchase, but you must have a Prime membership in order to contribute. TechCrunch reported that the feature appears to be inspired by elements of Facebook’s (FB) Instagram as well as Pinterest.

In other big news during the second quarter, Amazon announced a $13.7 billion acquisition bid for Whole Foods (WFM), which would provide it with a network of 468 stores throughout the United States and the United Kingdom. The deal is still pending regulatory approval, and some groups have raised anti-trust concerns regarding the acquisition. The acquisition comes as the company continued to announce new cities it will expand its grocery delivery services.

Beyond its online retail operations, many analysts have focused on Amazon Web Services in recent quarters, which provides a variety of cloud-computing services. In the first quarter, that division generated $3.66 billion in revenue, 10.2% of its overall revenue.

FIGURE 1: NEW HIGHS FOR AMAZON. Amazon (AMZN) has continued to increase this year and broke through the $1000 mark for the first time ever. So far in 2017, the stock is up almost 40% and recently hit new all-time highs. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Amazon Earnings and Trading Activity

For the second quarter, Amazon is expected to report earnings of $1.40 per share, down from $1.78 in the year-ago period, on revenue of $37.2 billion according to Wall Street consensus analyst estimates. The company’s revenue is projected to increase 22.4% from $30.4 billion in Q2 2016.

Since the start of the year, the stock has marched upwards, breaking through the $1000 mark for the first time ever at the end of May. There was a selloff in June that hit many tech stocks including Amazon, but since then the stock resumed its climb to hit new highs above $1050 in recent trading, and is up almost 40% in 2017. Heading into earnings, options traders have priced in about a 3.5% potential share price move in either direction around the company’s report, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the July 28 expiration, calls have seen a range of activity across strike prices, with a concentration at the 1050 strike price, right at the money. Puts have also been active across a number of strikes, with the highest volume at the 1000 and 1010 strikes. The implied volatility sits at the 72nd percentile.

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.

Looking Ahead

Tomorrow after market close, chipmaker Intel Corporation INTC reports its second-quarter results. On Friday morning, we’ll get a look at the energy sector with Chevron Corporation CVX and Exxon Mobil Corporation XOM earnings. Also keep an eye out for Q2 GDP estimates coming out on Friday. Forecasts are calling for almost double the growth reported for Q1, and we could see heightened volatility depending on this quarter’s estimates.