Amazon (NASDAQ:AMZN) operates as an online retailer in North America and internationally. It serves consumers through its retail websites and offers programs that let others sell their products on the company’s and their own branded websites. Amazon also serves developers and enterprises through Amazon Web Services, which provides access to cloud-computing technology developers can use to enable virtually various type of business. Further, it manufactures and sells the Kindle e-reader line. And it provides fulfillment services; miscellaneous marketing and promotional agreements, such as online advertising; and co-branded credit cards.
The combined events of Apple (NASDAQ:AAPL) likely set to introduce a smaller iPad and Google‘s (NASDAQ:GOOG) launch of the Nexus should put even more pressure on Amazon’s Kindle, likely taking from its market share. Given the minuscule margins on its e-readers, Amazon’s pricing power, which has been the biggest detriment to the stock, should become even a larger concern.
For a stock trading at trailing 12-month P/E of over 180, any negative surprises will be met harshly. One only need look at Netflix (NASDAQ:NFLX) and Green Mountain Coffee Roasters (NASDAQ:GMCR) for recent examples of high-flyers with extreme multiples that finally broke down when competition surfaced. While AMZN certainly is still the biggest player in Internet commerce, its days of being the only elephant in the room may be winding down.
Yes, earnings may actually grow from present levels, but I think the multiple attached to them will shrink considerably. I look for AMZN to retest the 200-day moving average at 205 by September expiration.
Based on AMZN’s closing market price of $227.06 for July 5, and using a target price of $205 and a target date of September 21, 2012, option strategies to consider include buying a June put butterfly, selling an iron butterfly, or selling an iron condor, or using another options strategy that best fits your trading style and risk-return objectives.
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As of this writing, Tim Biggam does not own any shares mentioned here.
