Is Amazon a Buy at All-Time Highs?

With shares of Amazon (NASDAQ:AMZN) trading around $298, 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 focus on selection, price, and convenience. The company also manufactures and sells Kindle devices. Amazon offers programs that enables sellers to sell their products on the company’s websites — including the sellers’ own branded websites — and fulfill orders through them. It also offers 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 may be able to sell e-books for its popular Kindle e-readers for even less, now that Apple (NASDAQ:AAPL) has lost a trial accusing the tech giant of colluding with publishers to raise the price of e-books. Apple has been found guilty of breaking anti-trust law, after the firm’s agreement with publishers forced Amazon to raise e-book prices or risk losing the rights to sell certain titles. Amazon is a leader in the Internet commerce space, so look for them to continue to see rising profits as more consumers and companies opt for this method of shopping and selling.

T = Technicals on the Stock Chart are Strong

Amazon stock has seen an explosive move higher over the last several years. The stock is now trading at all-time high prices and does not yet see any significant signs of slowing. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? They are 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 signal 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 can help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Amazon Options

34.26%

83%

80%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, 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 significant 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 what that means for Amazon’s stock.

E = Earnings Are Mixed 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 can help gauge investor sentiment in 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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-35.71%

-43.66%

-528.57%

-97.56%

Revenue Growth (Y-O-Y)

21.88%

22.01%

26.94%

29.47%

Earnings Reaction

-7.24%

4.76%

6.87%

7.86%

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

P = Excellent Relative Performance Versus Peers and Sector

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

Amazon

eBay

Apple

Barnes & Noble

Sector

Year-to-Date Return

18.64%

9.41%

-19.87%

12.86%

8.94%

Amazon has been a relative performance leader, year-to-date.

Conclusion

Amazon is an Internet commerce giant that serves the needs of consumers, companies, and entrepreneurs worldwide. The stock has been on a bullish run over the last several years, and is now trading at all-time high prices. Over the last four quarters, investors in the company have generally been pleased, as earnings have decreased slightly while revenue figures have been on the rise. Relative to its peers and sector, Amazon has been a year-to-date performance leader. Look for Amazon to continue to OUTPERFORM.

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