Amazon Shares Should Soon Revisit Highs

According to the company's earning release, Amazon's (AMZN) first quarter earnings were $143 million, or 34 cents per share (see conference call transcript). This is compared with $111 million, or 26 cents per share in the same period of 2007. Analysts had been expecting about 33 cents per share, so there was no material surprise to the upside. Revenue on a YOY basis grew 37%, from $3.0 billion last year during the quarter to $4.1 billion this year. Amazon also gave a forecast that was in line with expectations, with projected revenues coming in at roughly $4.0 billion (at the midpoint of their projection range) .

AMZN's profit margin, which is what everyone seems to be focusing on today, at least on the "bear" side of the street, came in about 4.8% for the quarter, giving an operating income figure of $198 million. While that dollar figure is up 36% from the same period a year ago as revenues rose, the issue here seems to be that AMZN has spent heavily on fulfillment technology and efforts to lower prices, but the payoff has not been seen yet in the profit margins. YOY profit margins seem stuck at that 5% level, thus some disappointment with that figure seems to have crept into the shares yesterday.

Our opinion is that any company that can grow its revenues in this economic environment at a 37% annualized rate deserves a very close second look. Profit margins that can be maintained while revenues grow strongly will continue to put investors in a good spot. We believe AMZN shares will revisit their highs in the near future as the 36 million shares that are shorted in this name (nearly 12% of the float) cover their bets and move on to other, more vulnerable names.

Amazon's Fundamental Data:

• Current Price: $77.60
• Shares Outstanding 416.8 Million
• Market Cap $32.4 Billion
• Forward Price / Earnings (avg. Est) 36.6x
• PEG Ratio (5 Year Expected) 2.3x
• Price / Book 28.1x

INVESTMENT RECOMMENDATION

We recommend that investors purchase a May 2008 $75 call on AMZN and sell the May $85 strike price call. Current prices indicate that buying the $75 Call ($5.00 at present) and selling the $85 AMZN calls ($0.90 at present) would result in a net cost to investors of approximately $4.10, or $410 per spread. With AMZN presently trading at $77.60 investors are already $2.60 in the money with the lower priced calls. The break-even point on this spread is approximately $79.10 on the stock (calculated as the strike price of the lower priced calls ($75) plus the net cost of $4.10 for the spread).

Investors will have one month (until expiration on May 17th, 2008) to realize these levels if purchase of the spread occurs on Thursday, April 24, 2008. We would look to exit this call spread at a price point of $8.20 or greater. This means that if you can sell the $75 call and buy back the $85 call in the near future for a total price of $8.20, or $820 per spread, we would exit the trade. This ‘trigger’ order can be entered with your broker. Return target: 100%.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Disclosure: Analyst has no position in AMZN options.

Comments

[Onecent]

"Our opinion is that any company that can grow its revenues in this economic environment at a 37% annualized rate deserves a very close second look."

Well, and, therein lies the problem, the consumer spending environment is an increasing disaster. Come on, past the hype and the ridiculous p/e assigned to AMZN, it's still basically a retailer of mostly discretionary goods.

[TanToday]

-->>Come on, past the hype and the ridiculous p/e assigned to AMZN, it's still basically a retailer of mostly discretionary goods.

LOOK DEEPER.

Factor in these intangibles:

One - If you save 15 miles of driving to get your stuff round trip, with gas at $3.60 a gallon you saved $2.10 on a car getting 25mpg.

Two - NO sales taxes, on a $100 purchase that saves 6 bucks average.

Three - Amazon Prime customers get UNLIMITED two day FedEx delivery

So, by shopping "by keyboard" you save $8.10 on your $100 item, have it delivered to you, with a NO QUESTIONS asked return policy in two days, saving you 8%.

In a TIGHT market, where every dollar counts, Amazon is actually CHEAPER since most things are 20-40% off "store prices" and I'm NOT even counting that.

AND Amazon now has a program where thousands of independent merchants use the AMZN front end, and you shop with ALL of them, with the same front end look and feel, ALL backed by AMZN's no hassle refunds.

They put Borders on the block with this program, they are nipping at Blockbusters and Netflix with DVDs right to your TiVo { a VERY cool thing } and they put the CUSTOMER FIRST, and they live or die with MEETING YOUR DESIRES.

Not to mention the underappreciated KINDLE the hand held reader, ANY book you want, many papers, many magazines, in THREE MINUTES anywhere a cell phone works, even without a computer, it is downloaded with ONE CLICK and you have it with you always.

Wait till colleges figure this out, and put ALL the textbooks this way, NO MORE heavy books, NO MORE annual updates, you open an AMZN account, and chose your textbooks, and EVERYTHING is now on a little 1lb reader.

This will revolutionize everything, they beat the dead trees in stores, the plastic disks in stores, the mail hassles, and the cost of gas.

I see a HUGE upside, ESPECIALLY as they are moving this magnificent machine to markets around the world.

Disclosure: 300 shrs AMZN