Amazon: Don't Fall for Fool's Gold

It's tempting to bottom fish, especially after seeing a 60% implosion in Amazon's (AMZN) share price, but don't get sucked in by the seduction, it is still is too expensive. The shares have already rallied more than 35% from their lows, so they are fast approaching overbought status, and are possibly subject to a substantial dose of profit taking. Analysts' 2009 estimates of $1.63 are on the optimistic side even though they show a meager 14% growth rate versus 2008 estimates of $1.43. It amounts to a "pie in the sky" prognostication, considering we still have a ways to go before the economy gets back to normalcy.

The multiple is too high: The shares are selling at about 36 times 2009 estimates, and just meeting those lofty estimates could present a challenge. AMZN's forward PE stands at more than twice that of the S&P 500 index, telegraphing a warning to steer clear.

Liquidity and book value: Although AMZN holds about five times as much cash as debt, it could be prone to burning cash, if  the Kindle starts to go south. The company would most likely need to siphon cash off from its coffers in order to salvage the project, and this drain could translate into "throwing good money after bad." The shares sell at a staggering nine times shareholders' equity, so there is certainly no sense of value or confidence stemming from this metric.

Legg Mason Fund reduces exposure: According to a 10/10/2008 13G filing with the SEC, Legg Mason Funds have decreased their ownership position to 24 million shares or 5.7%. Their selling of AMZN shares was likely to raise cash in order to satisfy client redemptions. Jeff Bezos's 97 million share stake still presents a substantial potential overhang of supply, and could soften the stock price if he decides to go on a selling spree.

E-Commerce sales growth slowing: E-Commerce sales growth for the third quarter was only 6%, versus 13% in the second quarter. This 700 basis point drop is alarming, and does not bode well for AMZN's prospects for a robust holiday season.

Short interest jump: Short interest jumped  22% from 24.5 million shares to 29.8 million shares in October. This is good and bad. The good part is there are more potential shares to be eventually covered, prompting the possibility of a short squeeze. The bad news is the new shorts could be "smart money" such as market makers and hedge funds, and their bearish stance could be an omen of more gloom on the horizon.

Stock repurchase plan to the rescue?  Although AMZN has a $1 billion stock buyback plan in effect, it was surprising to learn the company did not purchase even a single share during its third quarter. Perhaps it felt the shares were still too costly. I expect that it is indeed utilizing this program in the fourth quarter in an attempt to prevent further erosion of the share price. This buying creates demand and sets a temporary artificial floor for the stock price.

Bottom line: The shares' recent rally enables those wishing to open a short position the ability to do so without chasing the shares to unrealistic levels to the downside. I wouldn't be surprised if the stock retests its lows of last month, but would likely cover in that vicinity, as getting greedy puts you in the "poor house" fast. Investors thinking they might have seen a bottom should run the other way, because the stock's recent appreciation has set up the perfect Bull trap.

Disclosure: Short AMZN.