Amazon.com, Inc. (NASDAQ:AMZN) reminded Wall Street last night that it is still a growth powerhouse … at least on the revenue side of things. But then, sales growth has never really been a problem for Amazon.
The company has seen revenue rise by more than 20% annually for the past five years. Amazon’s problem has always been spending, and regardless of today’s AMZN stock rally, you can the results clearly in the company’s earnings.
Prior to last quarter, Amazon had posted net income growth for eight straight quarters. That winning streak ended in July, as Amazon increased spending on content for Amazon Prime Video and shelled out $13.7 billion for Whole Foods.
Still, third-quarter earnings results were better than expected — including spending. Amazon said it earned 52 cents per share, and, while not a gain, results were flat with the same quarter last year. Analysts were expecting heavier spending, with earnings forecasts looking for a profit in a range of 2 cents to 7 cents per share, depending on who you ask.
While spending will remain a concern heading into 2018, it looks like Amazon has things under control for the time being. And that’s a major boon heading into the holiday shopping season … and for AMZN stock options traders.
Sentiment is only growing stronger on Amazon stock. The brokerage community emerged this morning to flood the shares with AMZN stock price target increases:
- Stifel Nicolaus: Raised to $1,313 from $1,100
- Oppenheimer: Raised to $1,165 from $1,135
- RBC Capital: Raised to $1,200 from $1,100
- Benchmark: Raised to $1,300 from $1,150
- J.P. Morgan: Raised to $1,220 from $1,180
- SunTrust: Raised to $1,270 from $1,190
What’s more, Amazon has also scored at least a pair of ratings upgrades from Raymond James (to outperform from market perform) and Monness Crespi Hardt (to buy from neutral). Overall, Thomson/First Call reports that 39 of the 44 analysts following AMZN stock have given it a “buy” or better.
Click to Enlarge That’s a lot of bullish sentiment that would give any contrarian cause for concern. But AMZN stock technicals are still backing the bullish line.
The shares opened more than 9% higher this morning, putting Amazon stock above former resistance at $1,050. Given the shares’ momentum, $1,100 could be well within AMZN’s reach by the end of the year — if not the end of next month.
Turning to Amazon’s options outlook, we find that not everyone has jumped on the bullish bandwagon. Currently, the November put/call open interest ratio rests at 0.96. That said, this ratio has trended lower for the past two months, coming in at an average of 1.13 for September and at 1.21 in August.
But the question remains, can AMZN stock maintain its current momentum, or will the shares flag after today’s earnings surge?
Judging by November implieds, additional gains are certainly possible. Options traders are currently pricing in a move of about 4% for AMZN stock heading into November expiration. Adjusting for this morning’s rally, this puts the upper bound just shy of $1,100 and the lower bound just above $1,000. Short-term support should now lay at $1,000, with $1,100 emerging as fresh resistance.
2 Trades for AMZN Stock
Put Sell: While I believe AMZN stock could be vulnerable to a period of profit taking or consolidation following earnings, the safest course of action for options traders to take would be to bet on support via a put sell position. Right now, the Nov $1,000 strike has plenty of potential.
At last check, this put was bid at $4.97, or $497 per contract. Traders will keep the premium received for entering the trade as long as AMZN trades above $1,000 through Nov expiration. Keep in mind that if AMZN were to trade below $1,000 prior to expiration, you could be assigned 100 shares of AMZN stock per contract sold at a cost of $1,000 per share.
Call Spread: With practically the entire brokerage community emerging to support Amazon following its quarterly report, and with the holiday shopping season getting ready to shift into high gear, a short-term bull call play would also make sense at this point.
If you’re looking to bet on a continued rally following earnings, a Nov $1,070/$1,075 bull call spread has potential. At last check, this spread was offered at $1.15, or $115 per pair of contracts. Breakeven lies at $1,071.15, while a maximum profit of $3.85, or $385 per pair of contracts — a potential return of about 230% — is possible if AMZN stock closes at or above $1,075 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
