Amazon (AMZN) has long been established as one of the Internet giants. It has outperformed all its major e-commerce peers including Google (GOOG), Apple (AAPL), and Sony (SNE) consistently for the past 5 years, with an exception of Apple's 2012 bubble. Owning a global brand with a retailing reach that spans the world, Amazon is one of those stocks that belongs in almost everyone's portfolio to some degree.
The company's performance has been so good that it has been difficult for investors to find a good entry point in as it continues its uphill progress. October of last year provided one good opportunity, the shares pulling back from around $260 to about $245 and then making a further drop down to $220 on November 15, 2012 to test its 200-day moving average before resuming its upward path.
The Thursday 3.1% pullback in share price offers a good opportunity to board the Amazon train up the mountain.
AMZN data by YCharts
Amazon has long been a leader in e-commerce. However, it has only recently begun to focus on strengthening this conduit with its customers by developing hardware platforms to more directly guide and control the user experience. Its first success in this regard was the Kindle e-reader. This simple device has crushed the competition and established Kindle as the 21st century word replacement for books and Amazon as the world's bookstore. Amazon came out of nowhere and in the book retailing markets and can now be declared the definitive winner over established book retailer Barnes & Noble (BKS).
Barnes & Noble was already lagging far behind Kindle with its Nook e-reader when it announced on January 2, 2013 that its media sales through the Nook would probably be 12% below the 2012 Christmas season but it still expected them to deliver $3 billion in media revenue for 2013. Just 42 days later, on February 13, 2013, BKS had to report that the $3 billion forecast for 2013 is already unachievable.
Apple began as a computer company but achieved its actual success by re-directing itself into the leading innovator of e-delivery of consumer goods and services. The iPod, iPhone, and iPad all are quality hardware with slim margins. They succeed because each serves as a portal for Apple to provide goods and services to consumers.
Sony has been in the e-reader market since before both the Kindle and the Nook, yet it remains mired as a minor niche player. Its early hardware was overpriced and equipped with a poorly designed user interface. Its most recent entry into the e-reader market is still priced at a slight premium and retains a poor user interface. The company remains a distant third place dark horse at this time.
Apple has a reader app for its iPad but it is in no way an e-reader. It lacks the ability to be read in lighting conditions ranging from pitch dark all the way up through bright daylight. Further, E-Ink ultra low power consumption advantages give them many days or even weeks of battery power. The best tablets still measure their battery life in hours. Further, all tablets are too heavy to effectively make a good e-reader.
The Kindle Fire is a mid-range tablet that has the potential to ramp up this retailing model for the rest of Amazon's consumer goods. However, Amazon remains vulnerable in both its established e-reader dominance and in any expansion into the tablet markets as a retailing gateway device because of its mediocre implementation of the user interface.
Given Amazon's emergence at this time in early 2013 as the winner of the e-reader wars of the past decade and its solid position as the current e-retailer leader facing off with Google and Apple, I believe the pull back of 4.2% from yesterday's open to current $263.65 on the downgrade by JPMorgan (JPM) may offer a good buying opportunity for investors looking to stake out a position in e-commerce.
As Chris Nichols points out in his blog;
On average, Wall Street analysts have a target price of $316.13 for Amazon, FactSet data show. That would be a 15% increase from the prior close. The low price target is $245, and the high is $370. Amazon has around twice as many buy or overweight ratings as it does holds or neutrals.
It is time to dump Apple and buy Amazon. As the one-year performance comparison shows, Amazon has consistently outperformed AAPL since mid 2012, even before the Apple bubble burst.
AMZN data by YCharts
Initiating a position using covered options can make the entry point even more attractive at this time
Selling the AMZN April 20 $265 strike price cash covered put for a premium of $8.15 will net the investor a 3.1% return on a 36-day commitment of funds to cover the strike price (an annualized return rate of 31.4%) if the shares rebound and move up out of the money from the current $263.65 price. Conversely, if the shares do decline, the $8.15 premium reduces the investor's effective entry price to $255.50, providing a 3.1% discount from establishing a position by purchasing shares at retail price today and only 4% above the most bearish analysts' low side estimates.
More bullish investors might prefer going long AMZN at the current $263.65 and selling covered calls on their position to reduce their effective entry price. The April 20 $270 call premium is $4.75. This reduces the entry price to $258.90. Should shares advance, the $6.35 intrinsic gain on the strike price added to the $4.75 covered call premium yields an $11.12 gain for holding the shares for 36 days. This is a return of 4.2% (annualized return rate of 42.7%).
Investors are advised to move fast to initiate one of these attractive positions.
Disclaimer: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.