Amazon (AMZN) stock is soaring after delivering an earnings report that beat on both the top and bottom lines, with AMZN up some 8% in early Friday trading.
Revenues came in at $25.36 billion, besting consensus estimates of $24.92 billion. Amazon reported earnings of 17 cents per share, trouncing expectations of a 4-cent loss. Most of the earnings beat was attributable to Amazon Web Services (AWS), which showed a net profit of $520 million.
Analyst estimates for the fourth quarter come to $35.21 billion in revenues and EPS of $1.54.
Of the top 50 U.S. stocks by market cap, AMZN is far and away the best performer year-to-date, with the Amazon stock price nearly doubling versus the 2014 closing price of $310.35.
With Amazon stock above $600, the company’s market cap is now $287 billion, making it No. 8 on the list of the largest publicly traded U.S. companies, just behind General Electric (GE). Amazon is valued at nearly $100 billion more than fellow competitor Walmart (WMT).
While the current growth of Amazon is certainly impressive and undisputed , the law of large numbers will likely make it difficult for AMZN to continue to grow at the same rate. One only has to revisit the NASDAQ darlings of the dot-com era such as Cisco (CSCO) to see the after-effect of unrealistic growth prospects.
As a comparative, WMT trades at a price/sales ratio of 0.39 on annual revenues of $485 billion. AMZN sports a hefty price/sales ratio of 2.75 on annual revenues of $95 billion. To put it in context, investors in AMZN are paying nearly 7 times more for sales than investors in WMT.
Operating margin at WMT are currently at 5.35%, versus only 0.80% for Amazon. Certainly AWS will help to lift those margins for AMZN, but there is certainly a lot of heavy lifting to be done to bring margins to a more profitable level.
So, for investors looking to add AMZN to their portfolios at current Amazon stock price levels, it comes down to a matter of faith. The question is whether that faith is justified and reasonable (or even mathematically viable).
Amazon Stock Trade
While I believed in the company when the Amazon stock price was below $500, I am a little skeptical about AMZN at $600. I will be looking to sell some out-of-the money call spreads on AMZN to position for the rally to at least temper over the next few weeks post-earnings, while giving me a cushion in case the stock continues to move higher.
In particular, I will be structuring the trade one standard deviation out-of-the-money in regular November options, using a five-point spread to define the risk.
Here’s what I suggest: Sell the AMZN Nov $680 call and buy the AMZN Nov $685 call for 70 cents net credit.
The maximum gain on the trade is the net credit received of 70 cents, while the risk is $4.30, making return on risk 16.28%. I would look to cover some of the position if AMZN stock trades above $675, while hoping to let the position expire worthless if Amazon stock remains well-behaved.
As of publication, Tim Biggam had no position in the aforementioned securities
