Is Amazon an Attractive Investment?

With shares of Amazon (NASDAQ:AMZN) trading around $337, 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 in trouble with the Federal Trade Commission. Not for its online shopping, but for its lack of a verification system for app purchases and downloads. While Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) have taken steps to help prevent in-app purchases by children, Amazon refuses to change its current system, claiming that it has sufficient parental controls. The FTC disagrees with the online retail giant. The federal agency is ready to file a complaint in court against Amazon over it. Amazons’ legal representation sent a letter to the FTC after hearing this news: “After what we believed were constructive meetings with you over the last several weeks focusing on Amazon’s customer-centric approach to in-app purchasing, FTC staff have informed us that they have been authorized to file a complaint against us in a federal district court if Amazon doesn’t enter a consent order in the model of the Apple consent order.”

Amazon’s letter continues by explaining that the company takes children’s unauthorized in-app purchases seriously. It refunds any purchase a user claims is unauthorized and has software for when children use Amazon devices. TechCrunch reported that the company is willing to fight the FTC in court. The short version is that the FTC wants Amazon to adopt a system more like those put in place by Apple and Google, in which a user has to authorize every purchase by default. Amazon is refusing to change and is willing to fight the FTC. Apple and Google took the opposite route when problems arose from their previous in-app purchasing policies. Apple adopted this system after getting in trouble with the FTC for its 15-minute window that allowed users to make purchases without another verification. Apple refunded customers after settling with the government agency. Google changed its policy after getting served with a class-action lawsuit by a New York woman whose sons made about $66 in in-app purchases on her Samsung device. Amazon has yet to adopt such a system. This conflict between Amazon and the FTC is important now because of the timing. Amazon’s primary device has been the Kindle line of e-readers and Kindle Fire tablets. Now that it is launching an Amazon smartphone, its policy is especially important.

T = Technicals on the Stock Chart are Strong

Amazon stock has been moving higher in recent times. The stock is currently trending higher and looks poised to continue. 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 between its rising key averages which signal neutral 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

33.07%

96%

94%

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

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

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

-15.40%

-7.15%

52.51%

-45.70%

-2.93%

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 in trouble with the Federal Trade Commission for its lack of a verification system for app purchases and downloads. The stock has been moving higher in recent times and looks poised to continue. Over the last four quarters, earnings and revenues have been rising. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Amazon has been an average performer year-to-date. Look for Amazon to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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