Amazon (AMZN) had a huge spike at the end of April rising from 194 to 224 in a single event. The key question that presents itself is this: Can Amazon stay up there or will it fill the gap?
It is understandable why it rose as investors with great anticipation poured money into the company. Its Q1 2012 earnings showed revenue grew to $13.18 billion, up 34% year-over-year. Electronics and other general merchandise sales grew around 43% in the North American and international markets.
Yet one major concern for the company keeps at least one analyst cautious. After the spike, Morgan Stanley said it remains cautious on Amazon.com shares because revenue/unit volume is beginning to decelerate as operating margin sits at the lowest level since Amazon.com first turned a sustained profit way back in 2001.
This is a rightful concern. Margin pressure came as it continues to aggressively expand and subsidize the Kindle. Presently, it sells below cost, and is supposed to be the main driver for growing media sales, currently 30-40% of its overall revenue. For Amazon, margins should improve going forward as e-content sales increase. The company also purchased Kiva Systems to help reduce operating costs. This in turn, will help stem the decline in its margins and maybe even improve them a bit.
I believe the ability to stay up rests with the ability to keep the Kindle competitive. Amazon's Media sales, which comprise e-content, books, DVDs and music, grew 19% this quarter. And it is the Kindle that is going to continue to drive revenue growth for the company.
With the competitive nature of Apple competing in the tablet market and moving to position the iPad as an all-purpose tablet, instead of just a content consumption device, it is going to be hard on Amazon. For this reason I am taking a position that the stock is going to pull back and it would be advisable to create a short term income opportunity.
The Option Play
- Buy a July 2012 call with a '220' strike (priced at $10.90)
- Sell a July 2012 call with a '215' strike (priced at $8.85)
- Net Debit to Start: $2.05
- Maximum Profit: $2.95
Reasoning behind the Trade
- With tight margins, even the slightest move in the wrong direction can set the price of the stock down.
- Apple is coming in strong against the Kindle, and it will be hard for it to keep sales percentages.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.