by John Jagerson and Wade Hansen | October 25, 2012 11:20 am
Recommendation: Await Amazon’s (NASDAQ:AMZN) Oct. 25 earnings report. If the stock falls on weakness, the range of $210 to $220 is technical support. Buy at that level.
Options alternative: Buy to open the 210 April 2013 Calls on a bounce from support following the earnings report.
No, the Kindle isn’t as glitzy as the iPad. But it is significantly cheaper, which could spell big opportunity for Amazon in education markets.
So far, the tech giants that have announced for the quarter are echoing a similar theme for their Q4 outlook: a seismic shift away from the PC-oriented world toward one dominated by mobile. Earnings disappointments from Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Google (NASDAQ:GOOG) and Advanced Micro Devices (NYSE:AMD) highlight this transformation.
“We’re really starting to live in a new reality,” Google CEO Larry Page told analysts on its quarterly conference call. Companies that are profiting in this new environment are those that have already figured out their own unique formulas for exploiting mobile.
Finding the Formula for Mobile
The $106 billion Amazon saw this sea change coming early. It has remained the top online retailer as consumers increasingly move their browsing and shopping to smartphones and tablets.
That shift is part of the reason Amazon has made the Kindle a centerpiece of its business model. Unlike Apple (NASDAQ:AAPL), which derives 26% of total revenue from iPad sales, and 70% of revenues from iOS mobile device sales overall, Amazon sells its devices at cost to get a Kindle in as many hands as possible to generate sales of e-books, videos, music and apps.
While both companies are pioneers of the mobile-centric frontier, Apple is a device company and Amazon is a content company — and their respective strategies show that.
But … the iPad Mini!!!
I know. This week’s new releases are the best thing to happen to the iPad since the iPad. But it’s relatively small news as far as Apple’s business goes, and the new iPads may not even give it a leg up in an arena where cheaper mobile devices are poised to explode: education.
Both Amazon and Apple envision a future in which tablets are as common in the classroom as pen and paper. This is potentially a vast market. Apple was the frontrunner, but Amazon’s new Whispercast service seems like it will be the most comprehensive, usable and educator-friendly experience.
And it’s important to note that even with bulk discounts for educators, older iPad models can still sell for substantially more than new Kindles. A refurbished iPad sells for $379, while new Kindles retail for $119-$199. Even with a preorder price of $329 for an iPad Mini, the Kindle poses an attractive option for stressed school budgets.
The Most Expensive Time of Year … for Consumers
The holiday shopping season will still be the make-or-break time of year for traditional as well as online retailers. However, analysts expect increases of a modest 4.1% in holiday sales in 2012 for bricks-and-mortar retailers, but online sales are expected to grow by more than 12% over last year. Amazon is poised to benefit from this healthy growth in an otherwise anemic consumer spending environment.
The Technicals: AMZN Ain’t Cheap
You won’t find AMZN on any “great value stocks” lists. It’s trading at 99x earnings, a jaw-dropping figure even with equities back within 8% of their 2007 highs. Any missteps could prove costlier than they would to a company trading at only 20x earnings.
This, however, is where AMZN excels. Part of the reason for this valuation is that the company has delivered compound annual returns of 30%+ over the last 10 years. With a multiple this high, investors are anticipating similar returns.
With a recent sharp pullback that has knocked Amazon down by nearly 11% in just the last five weeks, a “buy on the dips” opportunity may be in the works. AMZN reports today after the close, and analysts are expecting a loss. A lot could happen going into Q4 with company guidance and expectations-setting over the holiday season.
Best to let the dust settle while staying on the sidelines to get a good read on how the Street will digest their announcement.
Click to EnlargeHowever, $210 to $220 has historically been a technically important range for the stock, often finding support/resistance here or gapping through the level. If the stock falls to this range on weakness from the report, it could be a sound time to begin piecing into it. If AMZN beats or provides upbeat guidance, use your best judgment.
Option traders may want to deploy a similar strategy for the next two quarters on a bounce from support. If the stock drops to $210, we recommend the “at the money” April 2013 calls. We estimate that if the stock does fall to $210, the price of those options will be in the $24 range, but there’s some variability depending on how far AMZN actually drops.
John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.
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