Will the Latest Kindle Send Amazon Higher?

With shares of Amazon (NASDAQ:AMZN) trading around $311, 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 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 unveiled its new Kindle Fire HDX tablets, one with a 7-inch screen and one with a 8.9-inch screen, late on Tuesday night. Amazon’s new Kindle devices are lighter and faster with more memory and longer battery life, according to a report from The New York Times. If users did nothing but read using the 8.9-inch model, the battery life would supposedly last 17 hours. The cheapest of the new Kindle Fire tablets will cost $139. Amazon is releasing the tablets into a competitive market that’s dominated by Apple’s (NASDAQ:AAPL) iPad.

T = Technicals on the Stock Chart Are Strong

Amazon stock has exploded to the upside in recent years. The stock is currently trading near all-time high prices and looks ready 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 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

28.38%

93%

90%

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

October Options

Flat

Average

November Options

Flat

Average

As of Wednesday, 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.

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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-150.00%

-35.71%

-43.66%

-528.57%

Revenue Growth (Y-O-Y)

22.36%

21.88%

22.01%

26.94%

Earnings Reaction

2.83%

-7.24%

4.76%

6.87%

Amazon has seen decreasing earnings and rising revenue figures over the last four quarters. From these numbers, the markets have 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), Barnes & Noble (NYSE:BKS), and Overstock (NASDAQ:OSTK), and sector?

Amazon

eBay

Barnes & Noble

Overstock

Sector

Year-to-Date Return

26.11%

7.06%

-13.30%

109.30%

16.48%

Amazon has been a relative performance leader, 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 worldwide. The company recently unveiled its latest line of Kindle products, which should prove to be a positive catalyst. The stock has been exploding to the upside and is now trading near all-time high prices. Over the last four quarters, earnings have been decreasing while revenues have been rising, which has left investors pleased with the company. 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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