Amazon (NASDAQ:AMZN) has baffled investors for over a decade. The story was that they couldn’t make money and that their model was a time bomb. Critics said that they were growing at the expense of everybody else’s profitability.
Now it’s clear that AMZN knew exactly what they were doing, and they do now turn a nice profit. Under the leadership of Jeff Bezos the Amazon team forced dozens of industries to change the way they do business.
As a results, the consumer gained a tremendous amount of convenience and accessibility. Things are cheaper to buy and we receive them in mere hours. I personally bought synthetic lawn for my back yard and had it delivered in two days.
Many AMZN haters turned into believers, and now the consensus that the unprofitable model could not last is dead.
Currently, Amazon dominates the cloud. They quietly expanded their AWS operation so everybody else is now playing catch-up. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and IBM (NASDAQ:IBM) have made headway but are still far behind the leader.
Our lives have become completely dependent on technology and specifically the cloud. Amazon sits pretty to reap the rewards of being early into the space. But the opportunity today lies in Alexa.
Amazon also was an early mover into the voice assistant arena. There Amazon Echo quickly became very popular in the U.S., but my bet is that the impact it will have on the company profitability is going to be tremendous.
Months ago I made several trades chasing Amazon stock to $2,000 per share and I won on that bet. Today I set another goal to $3,000 per share by next year. It sounds ridiculous, but it is feasible.
Consider the expansion of voice activation into home appliances for example. In fact Amazon just announced their first product which is a microwave that is voice activated. I bet that there will be dozens if not hundreds of other applications where manufacturers will want to license the Alexa technology.
This licensing income will have virtually no incremental cost. So top-line money will flow almost freely to the AMZN bottom line. The net result of that would be tremendous expansion to their earnings. This is not yet priced into the financial models.
Luckily I recently shared a trade that delivered about $5 per contract in profits so I’m rolling some of that forward.
Today’s idea is a pair trade where I buy the aforementioned upside hopium but I also eliminate my out-of-pocket expense. My only risk would be to own Amazon shares at a 30% discount from current price.
Fundamentally, AMZN stock is not cheap, but it’s justified. This is the ultimate startup company because it keeps finding new sources of income. When I evaluate a startup company I don’t ask for profitability for as long as they deliver growth. In this case, Amazon delivers both extreme gross and profitability.
Technically, it is hard to chase a momentum stock that is near its all-time highs, but in the current macroeconomic environment the trend is up. The U.S. tax law change added a broad propeller to charts which should be sustainable through next year. So unless markets in general crash, the Amazon stock trend should be intact for a few months.
AMZN Stock Trade Ideas
The Upside Hopium: Buy the AMZN April 2019 $3,000 call for $8.50 per contract.
To eliminate my out-of-pocket expense, I sell downside risk into proven support.
The Bank: Sell the AMZN April 2019 $1,300 put for $11 per contract.
Since the net result is a net credit, I am a winner already. And as long as the price stays above my puts, any money I recover from selling my calls will be incremental profits. I am not required to hold these positions through expiration. I can close either for partial gains or losses.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.