Where Will Amazon Go Next?

With shares of Amazon (NASDAQ:AMZN) trading around $322, 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 released disappointing second-quarter earnings, highlighted by slowing growth, no profits, and an estimated loss in the third quarter as the company continues to spend all of its operating cash-flow on expanding its business. As a result, the shares fell about 10 percent in after-hours trading. For years now Amazon has been forfeiting profits in order to grow its business. It invests its money in warehouses, infrastructure, and technology, and as a result, the company is valued at $165 billion and generates $80 billion in revenues with virtually no profits. In fact, it is expecting to lose money in the next quarter. Investors have justified owning Amazon, as the shares have risen relentlessly, by claiming that the company is solidifying its economic moat, and that in the future it will generate substantial profits that make investing in the company today akin to investing in a startup. And maybe this is true.

But as an investor, you need to realize two things. The first is that Amazon is a retailer, and retailers have an extremely difficult time digging economic moats because there is just so much competition. It faces a lot of competition in spite of its standing in the industry, and its standing in the industry has not given it any pricing power. The second is that quality investments generate cash flow, or in the case of young biotech or mining companies, they have clear plans to generate cash flow. Amazon doesn’t have such a plan. Thus, the company’s second-quarter earnings data shouldn’t surprise anybody: It was more of the same. But now things seem to be getting worse. One thing that investors were able to cling to was Amazon’s strong revenue growth. This has made it appear superior to competitors such as eBay (NYSE:EBAY), which generates a lot of cash-flow, but which grows at a slower pace. But Amazon’s growth is decelerating, and unless it hits the high end of its third-quarter guidance, it is reaching a point where growth is less than 20 percent.

T = Technicals on the Stock Chart Are Mixed

Amazon stock has been surging higher in recent times. However, the stock is currently pulling back and may need time to stabilize. 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

28.41%

13%

10%

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

Put IV Skew

Call IV Skew

August Options

Steep

Average

September 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 minimal 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 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

1,250.00%

27.78%

137.32%

-85%

Revenue Growth (Y-O-Y)

23.18%

22.84%

20.31%

19.23%

Earnings Reaction

-10.04%*

-9.88%

-10.99%

9.38%

Amazon has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Amazon’s recent earnings announcements.

* As of this writing

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

-10.08%

-2.98%

48.82%

-47.42%

-1.91%

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 stock has been surging higher in recent times, but is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had conflicting feelings about recent earnings announcements. 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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