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Amazon Spikes Following Earnings; Financial Details Breed Caution

|Includes: Amazon.com, Inc. (AMZN)

Tim Biggam, TradingBlock (April 27, 2012, 3:40 pm CDT)

Symbol Analyst Target Price Target Date
AMZN 215.00 June 15, 2012

Amazon.com, Inc. (ticker: AMZN) operates as an online retailer in North America and internationally. The company serves consumers through its retail websites and offers programs that enable sellers to sell their products on the company's and their own branded websites. The company also serves developers and enterprises through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually various type of business. Further, it manufactures and sells the Kindle e-reader. Additionally, the company provides fulfillment services; miscellaneous marketing and promotional agreements, such as online advertising; and co-branded credit cards.

AMZN just reported earnings, which on the surface were slightly better than expected. Revenues were a slight beat, while margins improved from horrible to just really bad. The stock responded with a ramp up from 195 to 225, or nearly 15%. Given that this was not exactly a cheaply valued stock coming into earnings (can you say 180 P/E multiple?), the magnitude of the post-earnings response seems somewhat overdone.

While AMZN is certainly a huge player in the internet space, at some point the company needs to translate revenues into earnings growth. Much of this quarter's earnings were somewhat manufactured by an after-tax accounting move that added nearly 65% to the bottom line. Additionally, forward-revenue guidance was less than stellar, and there is always the no-tax overhang with AMZN.

Given today's price action, I look for AMZN to struggle moving appreciably higher. The analysts' upgrades should provide a near-term cushion for the shares, so I look for AMZN to flounder around at these levels, with a price target of 215 by June expiration.

Play of the Day

Based on Amazon's (ticker: AMZN) current market price of $226.85 and using a target price of $215.00, a target date of June 15, 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 TradingBlock.com. Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Jun Put Butterfly +355% 42%
Sell Jun Iron Butterfly +167% 49%
Sell Jun Iron Condor +158% 53%
Sell Stock +11% 46%

* Click link to access TradeBuilder details on TradingBlock.com. Must have Instant or Actual account. Subject to change due to changing market conditions. Click here to view risks regarding selling stock short.

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. He currently does not hold any positions in AMZN.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.