Should You Add Amazon To Your Portfolio?

With shares of Amazon (NASDAQ:AMZN) trading around $274, 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 consumers through its retail websites and focus on selection, price, and convenience. The company also manufactures and sells Kindle devices. It offers programs that enable sellers to sell their products on its websites, their own branded websites, fulfill orders through them, and programs 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 a leader in the Internet commerce space so look for them to continue to see rising profits, as consumers and companies opt for this method of shopping and selling over the standard method.

T = Technicals on the Stock Chart are Strong

Amazon stock has struggled a bit this year but seems to have finally broken above this year’s pullback. The stock is now consolidating right above the breakout point so it may need a little time before continuing higher. 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 signal neutral to bullish price action in the near-term.

AMZN

(Source: Thinkorswim)

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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

28.19%

63%

61%

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

Put IV Skew

Call IV Skew

July Options

Average

Average

August Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, neutral over the next two months. To summarize, investors are buying a 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 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 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 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 increasing revenue figures over the last four quarters. From these numbers, the markets have been optimistic about 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 sector?

Amazon

eBay

Apple

Barnes & Noble

Sector

Year-to-Date Return

9.93%

0.93%

-18.19%

28.83%

6.84%

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

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Conclusion

Amazon provides consumers and businesses with an excellent shopping and selling experience that is steadily growing in popularity. The stock has struggled this year and is now consolidating above a recent breakout price level. Over the last four quarters, earnings have decreased while revenues have been on the rise, but overall, investors have been optimistic about the company’s earnings reports. Relative to its peers and sector, Amazon has been a year-to-date performance leader. WAIT AND SEE what Amazon does this coming quarter.

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