Amazon.com, Inc. (AMZN) Stock Has Reached Absurd Levels: Fade the Rally

Don’t get me wrong. I think Amazon.com, Inc. (NASDAQ:AMZN) is a great company. It is the Vampire Squid of the internet commerce space, devouring everything in it way. I just don’t like the stock price at these levels. Given the near-parabolic ascent of the recent rally, I expect AMZN stock to pull back from these extremes.

Amazon.com, Inc. (AMZN) Stock Has Reached Absurd Levels: Fade the Rally

It is important to remember that the last earnings report showed a pretty big miss on revenues, with $43.74 billion in sales versus expectations of $44.68 billion.

Guidance was also lowered to a range of $33.25 billion to $35.75 billion compared to a previous guidance of $35.95 billion.

While sales have grown 27% over the past year, the stock price has risen nearly 50% in that same time frame. This means the price-to-sales ratio has nearly doubled over the past year, driving the price-to-sales ratio to 3.2. This is the highest level since 2005 and well above the five-year average of 2.2.

Amazon is now the fourth-largest company in the U.S with a market cap of $425 billion. As a comparison, Wal-Mart Stores Inc (NYSE:WMT) sports a market cap of $220 billion, meaning AMZN stock is being valued at almost twice the level of WMT. Yet Walmart had $482 billion in revenue in 2016 versus only $136 billion for Amazon.

So AMZN stock is twice the price with only 28% of the sales … tough for such a huge company to grow into such an extreme multiple. Law of large numbers is definitely beginning to apply to Amazon.

I realize that investors in AMZN ignore fundamentals, even as crazy as they have gotten. After all, Daniel Salmon of BMO Capital Markets recently raised his target price for Amazon to $1,200 — more than a third higher than current levels.

A look at the technicals paints a similar overextended picture, though. AMZN stock is now the most overbought on a nine-day RSI basis that it has been over the past year with a reading well over 80. Previous times when Amazon approached the 80 level proved to be important short term tops in the stock price of Amazon.


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Amazon has also been up six days in a row, rising nearly 60 points off the March 27 low of $833.50. While normally fairly correlated to the Nasdaq 100, AMZN has diverged sharply over the past week, outpacing the broader market by 5%.

I look for this spread to converge somewhat and for AMZN stock to be a relative underperformer.

So with AMZN stock extended on practically every metric, a short-term bearish trade makes probabilistic sense. With implied volatility (IV) at the 44 percentile, selling an out-of-the-money call spread is the optimal way to position bearishly.

AMZN Stock Trade Idea

Buy AMZN Apr $920 calls and sell AMZN Apr $915 calls for a $1.20 net credit.

Maximum gain on the trade is $120 per spread with maximum risk of $380 per spread. Return on risk is 31.6%.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/amazon-com-inc-amzn-stock-absurd/.

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