Is Amazon a Healthy Investment?

With shares of Amazon (NASDAQ:AMZN) trading around $313, 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.

Stephen Colbert flipped off Amazon on his show last night in a segment skewering the retail giant for its ongoing battle with book publisher Hachette, which just happens to publish titles by Colbert himself. Amazon has effectively begun discouraging its customers from purchasing Hachette books — removing the option to preorder upcoming titles and in many cases pushing existing titles’ shipping times back by weeks — in an effort to gain leverage over the publisher while striking a new deal on ebook pricing. Colbert clearly has a stake in the fight, and his self-absorbed Colbert Report character is happy to admit that and to use it as a way to turn his viewers against Amazon and its CEO, Jeff Bezos. “Watch out Bezos,” Colbert says, “because this means war.”

Amazon’s huge presence as a bookseller means its actions can cause considerable trouble for Hachette, or really any other publisher that it picks a fight with. The Atlantic reports that Amazon may control around 50 percent of all book sales, physical and electronic combined, giving it a large allowance to push publishers around to its demands. As writer Sherman Alexie tells Colbert later in the segment, this is still a battle of two corporate giants. But that said, one is part of a waning industry while the other is a lone juggernaut. Amazon has said that it doesn’t expect this dispute with Hachette to clear up anytime soon, and for the time being, Colbert is encouraging his viewers to put on a small show of protest. In addition to Alexie suggesting people stop shopping there entirely, Colbert also wants people to put stickers on their books that read: “I didn’t buy it on Amazon.” The sticker pack can be downloaded from his website, but it’s up to you to figure out how to print them onto anything but printer paper. In case you’re wondering: Colbert’s most recent books can still be ordered from Amazon — you’ll just have to wait two to four weeks to start reading.

T = Technicals on the Stock Chart are Mixed

Amazon stock has been pulling back in recent times. However, the stock is currently surging higher and looks set to continue this path. 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

27.57%

21%

19%

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

Put IV Skew

Call IV Skew

July Options

Steep

Average

August 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 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

-21.40%

-8.41%

29.77%

-51.30%

-11.83%

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. Stephen Colbert flipped off Amazon on his show last night in a segment skewering the retail giant for its ongoing battle with book publisher Hachette. The stock has been pulling back in recent times, but is currently surging higher. 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.

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

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