Amazon Stock Weakness Presents Opportunities

AMZN stock
Credit:iStock.com/kasinv

Amazon Is the Death Star for Competitors

Amazon.com, Inc. (NASDAQ: AMZN) traded as high as $1,083.21 on July 27 but retrenched about 13.5% to $936.33 on August 29, which was a pretty decent trading opportunity for this generational company that is forcing retailers to restructure.

AMZN stock has since rallied back to the $973.00 level on Friday after recovering $940.74, representing the 38.2% retracement level from the high.

On the chart, Amazon stock is creeping back to its 50-day moving average (MA) of $986.41 while easily holding at above its 200-day MA of $899.10.

For those that trade options, I previously in July suggested an example of a Put Write option strategy to buy AMZN stock at a lower price than the $1,001 prevailing at that time.

My example was based on selling the AMZN January 2018 $945.00 Put Option at $46.85 per share or $4,685 for one contract.

Theoretically, if you undertook the trade, you could have purchased Amazon stock at $945.00.

Your adjusted cost base would have been $898.15 after adjusting for the $46.85 per share in premium income, and you would be up 8.35% at this time.

AMZN stock chart

Chart courtesy of StockCharts.com

The thing about Amazon is that the strong prospects for the company make a Put Write option strategy a good trade as any decline of over 10% in AMZN stock is an opportunity.

Also ReadThe 3 Moves by Amazon.com, Inc. That Impact AMZN Stock

Why AMZN Stock Is Worth the Valuation

Simply look at what Amazon has done in less than 25 years. The company has forced a shift in the way retailers have to do business in order to compete with Amazon.

We have seen hundreds of brick-and-mortar retail stores shut down due to the impact of Amazon. It was not a coincidence, and in my view, it could worsen for those retailers that fail to develop their online presence. And even if the retailers improve their online channels, it may simply be a case of “too little, too late.”

A clear example is in the highly competitive grocery sector. Up until the acquisition of Whole Foods Market, Inc. (NASDAQ: WFM), Amazon was a non-factor as the company was working on testing its “AmazonFresh” grocery stores and still has a long way to go.

The decision to buy Whole Foods was brilliant, as Amazon has reworked the supply chain and cost structure in order to lower prices at the grocery business.

Grocery rival Kroger Co (NYSE: KR) plummeted 9.8% intraday on Friday, reporting weakness and eliminating its forward guidance. I wonder if the new upstart Whole Foods was partly to blame for removing the guidance. I think so.

SUPERVALU INC. (NYSE: SVU) fell 7.54% intraday while Wal-Mart Stores Inc (NYSE:WMT) and Target Corporation (NYSE: TGT) also lost some ground.

In the case of Target, the retailer announced it would be cutting prices on thousands of products. The move was likely in response to the price cuts at Whole Foods.

The reality is that the brick-and-mortar retail sector is dying a slow death.

The negative trend is in place and I expect Amazon to continue to be ruthless and dig deeper to escalate the battle for retail supremacy that it dominates.

Analyst Take: 

While Amazon stock is quite expensive based on the forward multiple of 118-times its 2018 EPS and a PEG ratio of 6.4, the high valuation is deserving for a company that will likely rule the retail space and in fact any space it chooses to focus on.

The price of AMZN stock is high and likely to drive higher so any opportunity to buy on dips of over 10% of trade or via the use of a Put Write Option strategy makes sense.