The Contrarian Blog

Bulls Are Not Completely Sold on Amazon

by Karee Venema 4/18/2012 12:23 PM
Stocks quoted in this article:
Publication: "The New York Times"
Publication title: "Daring to Cut Off Amazon"
Publication Date: 4/15/2012
Brief Summary:

This article takes a hatchet to (AMZN) and its business tactics, with the author contending that the online retail behemoth practices monopolistic ways. By purchasing a product from the distributor, discounting it, and passing the savings on to the consumer, AMZN's strategy basically eliminates the "middle man." What this really does, according to the author, is takes away income from other retailers who are trying to sell the same product for the "real" price, by fostering "a low-price mindset among consumers." In fact, AMZN recently encouraged shoppers to browse brick-and-mortar stores, but then return home to purchase the items through AMZN. While these bargain-basement prices may seem appealing to the consumer in the short term, the author contends that this business model is "unsustainable," with both longer-term pricing structures, as well as AMZN's bottom line, in jeopardy.

Contrarian Takeaway:

Despite AMZN's ethical woes, the stock has fared well in 2012, with the equity currently sitting on an 8.8% year-to-date gain. Furthermore, the security has found a solid foothold atop its 90-week moving average. This trendline has contained all but two of AMZN's weekly closes since December.

Even though AMZN has put forth a solid technical showing, the bullish bandwagon remains far from overcrowded. In the options arena, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.01 indicates that put open interest and call open interest are nearly equal among options set to expire within three months.

Members of the brokerage bunch are split, as well. For starters, the average 12-month price target of $217.26 represents a lackluster 13% premium to the stock's current perch. Plus, 21 analysts maintain a "buy" or better recommendation toward AMZN, compared to 12 "hold" suggestions. As the stock continues to tack on gains, any price-target hikes and/or upgrades from this tepid group could encourage additional buyers to the table.

That said, traders should keep an eye on AMZN's April 26 earnings release. In its past four reports, the retailer has topped bottom-line expectations twice, and fallen short on two other occasions -- leaving room for another surprise when AMZN unveils its first-quarter results.

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