Is Amazon an Attractive Investment?

With shares of Amazon (NASDAQ:AMZN) trading around $375, 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’s rumored video game console/set-top box may support online video game streaming, but it will not resemble a typical video game console or set-top box, reports TechCrunch. According to “multiple sources familiar with the device,” cited by the publication, the device will look more like Google’s (NASDAQ:GOOG) Chromecast dongle and less like Apple’s (NASDAQ:AAPL) set-top Apple TV product. Like Chromecast, the Amazon device will presumably plug directly into a television set’s HDMI port.

According to TechCrunch’s sources, the Amazon device will stream “top-tier games” at a standard online video service speed of 30 frames per second. As previously reported by Re/code, Amazon has been seeking game developers with “experience designing and creating world-class games.” The device’s game streaming feature will complement Amazon’s digital PC game sales as well as the company’s Amazon Instant Video service. Amazon’s move into the video game console/set-top box hardware market follows the company’s similar moves into the e-book reader and tablet markets after it began offering media for those devices.

T = Technicals on the Stock Chart Are Strong

Amazon stock has been exploding to the upside in the last several years. The stock is currently trending higher and looks set 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 above its rising key averages, which signals neutral to bullish 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

23.86%

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

April Options

Flat

Average

May Options

Flat

Average

As of Tuesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish 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 bullish 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

137.32%

-85%

-150%

-35.71%

Revenue Growth (Y-O-Y)

20.31%

19.23%

22.36%

21.88%

Earnings Reaction

-10.99%

9.38%

2.83%

-7.24%

Amazon has seen rising 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), and Overstock (NASDAQ:OSTK) — and sector?

Amazon

eBay

Barnes & Noble

Overstock

Sector

Year-to-Date Return

-5.78%

5.37%

46.69%

-29.8%

5.12%

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’s rumored video game console/set-top box will not resemble a typical video game console or set-top box, reports TechCrunch. The stock has been exploding to the upside in the past several years and looks set to continue. 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. Look for Amazon to OUTPERFORM.

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