Is Amazon Ready to Break Out Again?

By Dr. Duru written for One-Twenty

May 21, 2007

{ RSS (XML) - Subscribe to my latest articles here: XML...... AND/OR ! }

The internet sector is ablaze again with excitement. Mega-deals, big dreams, and large prospects abound again. While Google's stock has not benefited from the recent surge in excitement, many other internet-related stocks have had a lot of fun. The one stock that amazes me the most is Amazon (AMZN) (see disclaimer here).

I have long been a skeptic of Amazon. I love the business, but not the stock. I shop at Amazon all the time. But it seemed to me that AMZN rarely produced "real" profits, and given the constant discounting, free shipping deals, and intense retail competition, I could not see a way for Amazon to reach sustainable profitability, much less grow profits. Well, after declining for nearly three years from 2003 to 2006, AMZN's stock has turned into a rocket as earnings have regained some positive momentum. Back in late April, AMZN beat earnings estimates and bumped revenue guidance upwards ever so slightly. This was enough for a 27% one-day gain, and the stock has not looked back since.

There are plenty of reasons you might not want to trust this move. For example, forward P/E equals 51 and price/book equals 73. The move also smacks of short-covering. Shorts were 15% of AMZN's float before earnings were reported. Despite these warning signs, I cannot help but relax the "hating" for a bit longer and appreciate the potential for another break-out for the stock. What has caught my eye in particular is that while the stock has churned for three weeks, OBV has steadily increased. This suggests that traders and investors continue to accumulate the stock. And if this is indeed the case, the sellers are slowly but surely drying up, and the stock is destined for another leg up - more pain for the shorts.

The second chart shows that AMZN is, incredibly, reaching now for levels last seen when the dot-com bubble first burst. Amazon last saw current levels in April, 2000. AMZN has finally climbed back above its 2003 high. It peaked in December, 1999 at a closing high of $112. So, it is still a long way off from new all-time highs. But if the S&P and the NASDAQ continue creeping higher, we can only assume AMZN will continue to benefit.

Be careful out there!

Amazon daily chart

Amazon nine-day chart

DR. DURU®, 2007