Does Amazon Belong in Your Portfolio?

With shares of Amazon (NASDAQ:AMZN) trading around $381, is AMZN an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Amazon serves its customers through its retail websites and focus on selection, price, and convenience. The company also manufactures and sells Kindle devices. Amazon offers programs that enable sellers to sell their products on the company's websites, including the sellers' own branded websites, and fulfill orders through them. Amazon also provides platforms that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. Online commerce has been on the rise because of the convenience, efficiency, and relatively low prices offered.

Amazon launched its AmazonFresh grocery delivery service in San Francisco on Wednesday, and if the service proves successful in its third location, AmazonFresh could become available in more urban markets throughout the United States next year. Amazon has challenged retailers in almost every other sector with its super cheap prices, so the question now is could its introduction into the grocery business hurt traditional stores like Wal-Mart (NYSE:WMT) or Kroger (NYSE:KR)?

T = Technicals on the Stock Chart Are Strong

Amazon stock has been exploding to the upside in the last several years. The stock is currently trading sideways and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Amazon is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Amazon options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Amazon options	28.34%	63%	60%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
December Options	Flat	Average
January Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Amazon’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Amazon look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	-85.00%	-150.00%	-35.71%	-43.66%
Revenue Growth (Y-O-Y)	19.23%	22.36%	21.88%	22.01%
Earnings Reaction	9.38%	2.83%	-7.24%	4.76%

Amazon has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with Amazon’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Amazon stock done relative to its peers, eBay (NASDAQ:EBAY), Barnes & Noble (NYSE:BKS), Overstock (NASDAQ:OSTK), and sector?

	Amazon	eBay	Barnes & Noble	Overstock	Sector
Year-to-Date Return	52.42%	Hot Low Price Companies To Own In Right Now -0.65%	-12.90%	96.35%	13.95%

Amazon has been a relative performance leader, year-to-date.

Conclusion

Amazon is one of the largest Internet commerce companies in the world, and it aims to serve the needs of consumers, companies, and entrepreneurs around the globe. The company launched its AmazonFresh grocery delivery service in San Francisco on Wednesday. The stock has been flying higher in recent years, but is now trading sideways. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has generally pleased investors in the company. Relative to its peers and sector, Amazon has been a relative performance leader year-to-date performer. Look for Amazon to OUTPERFORM.