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Amazon likely to slow following upswing

|Includes:, Inc. (AMZN)

Tim Biggam, TradingBlock  (October 7, 2011, 2:23pm CDT)

Symbol Analyst Target Price Target Date
AMZN 180.00 March 1, 2012, Inc. (ticker: AMZN) is a US-based multi-national electronic commerce company. The stock is up 15.35% since the beginning of this year, easily outpacing the overall stock market.

While AMZN is a great company, it has a not-so-great stock price. Even with the fervor surrounding the new Amazon Fire, the market cap of $97.58 billion and a P/E ratio of 94.83 give me great reason to pause, especially given the 63 multiple on 2012 earnings. Companies this big simply can't grow at the same rate; it’s the law of large numbers.

The news that AMZN will start collecting sales tax in the upcoming years in California and Tennessee looks like a precursor to charging sales tax across the US, lessening a competitive advantage. Target and WalMart, the two biggest competitors on the retail side, have made strides recently in their online sites, another potential headwind.

With only 3% margins, the company has to generate enormous revenue growth to justify its lofty multiple. So while revenues and earnings will grow, the torrid rate is sure to slow, leading to a multiple contraction. I look for AMZN to drop back to the 180 level by March 2012. 

Play of the Day

Based on Amazon's (ticker: AMZN) current market price of $227.49 and using a target price of $180.00, a target date of March 1, 2012 and $10,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Apr Put Spread +82% 33%
Sell Apr Call Spread +74% 40%
Buy Apr Put Condor +70% 32%
Buy Stock +20% 42%

* Subject to change due to changing market conditions.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services