Does Amazon Have Potential for New Highs?

With shares of Amazon (NASDAQ:AMZN) trading around $296, is AMZN an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Amazon serves its customers through its retail websites and focuses on selection, price, and convenience. The company also manufactures and sells Kindle devices. Amazon offers programs that enable sellers to sell their products on the company’s websites, including the sellers’ own branded websites, and fulfill orders through them. Amazon also provides platforms that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. Online commerce has been on the rise because of the convenience, efficiency, and relatively low prices offered.

Amazon is debuting three new original children’s television series on its Prime Instant Video streaming service this summer as a way to compete with rival Netflix (NASDAQ:NFLX), which has focused on adults with its award-winning original shows. Amazon also has several original adult series and has previously approved the pilots for the children’s shows Gortimer Gibbon’s Life on Normal Street and Wishenpoof!. “Amazon Studios is thrilled to bring its first original children’s series to kids and their families this summer. We’re working with some of the most renowned creators in the business to introduce programming that promotes life-long learning through play,” said Tara Sorensen, head of kids programming at Amazon Studios in a press release. “The kids programming team and series creators have had so much fun developing these new series. We can’t wait to share it with kids and their families across the country and see the learning experiences it fosters.”

The shows are coming out over the summer and are marketed as a way to keep kids entertained and engaged with learning while on summer break from school. To help make the shows educational and fun, Amazon hired Alice Wilder, the woman who worked as producer and director of research and development for the popular children’s series Blue’s Clues. That show asked its viewers to help the blue dog find clues and solve puzzles. Amazon promised that her involvement means parents can rest assured that their kids will be learning “valuable skills and life lessons” while watching the new shows as well as being entertained. “It’s been extremely exciting to partner with Amazon on developing the content and activities that will be available through Prime Instant Video. We share the belief that creativity and curiosity are muscles that need to be exercised, refined and nourished to provide children with the skills they need to succeed in today’s rapidly changing world,” Wilder said in the press release. “With an educational system that is focused on test-preparedness, literacy and numeracy, many parents find their kids faced with a curriculum gap. By combining core content with creativity and play, we will be able to help parents fill that gap.”

T = Technicals on the Stock Chart Are Weak

Amazon stock has been pulling back in recent times. The stock is currently trading sideways and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Amazon is trading below its rising key averages which signal neutral to bearish price action in the near-term.

AMZN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Amazon options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Amazon options

28.52%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Amazon’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Amazon look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

27.78%

137.32%

-85%

-150%

Revenue Growth (Y-O-Y)

22.84%

20.31%

19.23%

22.36%

Earnings Reaction

-9.88%

-10.99%

9.38%

2.83%

Amazon has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Amazon’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Amazon stock done relative to its peers, eBay (NASDAQ:EBAY), Barnes & Noble (NYSE:BKS), Overstock (NASDAQ:OSTK), and sector?

Amazon

eBay

Barnes & Noble

Overstock

Sector

Year-to-Date Return

-25.70%

-4.73%

10.37%

-48.30%

-16.09%

Amazon has been an average performer, year-to-date.

Conclusion

Amazon is one of the largest Internet commerce companies in the world, and it aims to serve the needs of consumers, companies, and entrepreneurs around the globe. The company  is debuting three new original children’s television series on its Prime Instant Video streaming service this summer. The stock has been pulling back in recent times and is currently trading sideways. Over the last four quarters, earnings, and revenues have been rising, which has pleased investors in the company. Relative to its peers and sector, Amazon has been an average performer year-to-date. WAIT AND SEE what Amazon does this quarter.

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