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Buy Amazon's Breakout for Potential Double-Digit Profits in 2014

I dread going to the mall around the holidays. At least 10 minutes of circling before you can find a parking spot, crowded stores and insane lines by the cash registers. This year, I bought my gifts early and shopped almost entirely online.

Apparently, I am not alone. According to the retail association, Shop.org, 2013 online holiday sales are forecast to rise by between 13% and 15% from last year, reaching a total of about $82 billion.

That number is expected to continue growing over the coming years. By 2020, U.S. online retail sales are expected to reach $508 billion, according to FTI Consulting.

The trend toward online shopping is having a positive impact on revenues of many online retailers. One is e-commerce giant Amazon.com (AMZN). According to researcher ChannelAdvisor, as of Dec. 17, holiday sales on the site were up 39% from this time last year.

The increase in online shopping was felt across several buying platforms. There was a 64% rise in purchases made by computer, a 16% increase from people shopping on their tablets, and a 20% surge from those buying on their smartphones.

With online retail sales projected to steadily rise over the coming years, Amazon -- currently the world's largest online retailer -- will almost certainly benefit. The company, which started in the mid-90s as an online bookstore, is now one of the most diversified e-commerce retailers, offering a vast selection of books, toys, electronics, food, jewelry and even cloud computing services.

Amazon always pushes the envelope when it comes to finding new ways to deliver goods. As I mentioned in my recent article on drone play AeroVironment (AVAV), Amazon just announced the development of a drone-based delivery service called Amazon Prime Air, which aims to deliver a package in less than an hour after purchase.

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Amazon, while not usually thought of as a tech play, is also becoming an important player in electronics. Best known for its Kindle e-book-readers, Amazon also saw 157% year-over-year tablet sales growth in the first quarter of 2013, according to research firm International Data Corporation.

With global tablet sales forecasted to continue rising, Amazon should reap the benefits. According to research from Canalys, there will be about 285 million tablets sold globally in 2014. By 2017, this number is expected to increase 39% to 396 million.

The bullish forecasts for both general online retail and electronics sales are two factors helping drive AMZN higher. As the below chart shows, the stock has been moving steadily up for the past two years.

AMZN Stock Chart

Rising off a December 2011 low of $166.97, shares formed a major uptrend and have more than doubled to date.

In July 2013, the stock hit a high of $313.62, but backed off this level, falling to a low of $279.33 in August. This low was just above support provided by the intersection of the major uptrend line. However, shares bounced back even more quickly than they fell. By October, the shares definitively broke $313.62 resistance. 

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Upon breaking through this resistance, which now serves as support, AMZN formed an accelerated uptrend. By early December, the stock hit an all-time high of $399, almost $100 higher than the $313.62 previous resistance. 

Shares then retreated slightly with a small zone of resistance forming between $396 and $399 with round-number resistance just above at $400. Then, on Friday, AMZN broke out, clearing resistance and making a new all-time high above $400. With no overhead resistance, the stock could continue to surge.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming fourth quarter, to be reported in late January or early February, the company expects sales to increase just over 22% to $26.03 billion, from $21.27 billion in the year-ago quarter. And analysts expect full-year 2013 revenue will grow almost 23% to $74.93 billion from $61.09 billion last year.

The earnings outlook is similarly positive. For the fourth quarter, analysts project earnings will soar 214% to $0.66 per share from $0.21 per share in the comparable year-earlier quarter. For the full 2013 year, earnings are expected to stage a dramatic turnaround from -$0.09 per share last year to $0.73.

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Given the bullish outlook, I plan to go long on the world's biggest online retailer.

Risks to consider: Amazon is attempting to establish its presence not only as an online retailer, but also as a technology force, selling products like tablets and cloud computing services. The evolution has meant expensive investments in product development. The list of technology companies that have had hit products only to falter is long, and BlackBerry (BBRY) is one recent example. However, AMZN's foray into tech should be counterbalanced by its strong revenue from being a general online retailer.

Recommended Trade Setup:

-- Buy AMZN at the market price
-- Set stop-loss at $378.89, just below support marked by the intersection of the accelerated uptrend line
-- Set initial price target at $489.88, just below $500 round number resistance, for a potential 22% gain by late 2014

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