Short Opportunity for Amazon

Amazon (AMZN) apologists defend the company's stratospheric multiple by rationalizing its strong earnings growth. The problem is, AMZN is slated to have very little of this in 2009, as analysts are expecting only a 6% earnings gain from $1.38 to $1.49, and even this paltry forecast could be too optimistic in today's recessionary environment.

Shorting opportunity arises: The shares have vaulted nearly 66% in just the last four weeks, giving those who missed going short , the opportunity to do so without having to chase the shares .The stock has simply gone up too much in too short of a time and is ripe for a heavy bout of profit taking. The stock is prone to a potential correction which could easily shed $10 off its share price in a matter of days.

PE versus peers: At a current PE of about 37, AMZN's multiple is more than three times that of CSCO, MSFT, EBAY or INTC. AMZN simply does not justify a multiple so high. In fact, MSFT's earnings are slated to grow more than 12% or double AMZN's expected growth rate of 6%, yet MSFT is carrying a multiple of just 11 times earnings. Sure, AMZN is proficient at growing its top line, but apparently at the expense of its gross margin. AMZN's third quarter gross margin was just 23.4%, how much lower will it crater in the fourth quarter?

Fourth quarter guidance cut: Last quarter management reduced its fourth quarter guidance to a sales range of $6-7 billion and earnings of $145-$300 million. Analysts have come in with about a midpoint consensus to this range, nearing $6.47 billion of sales and $172 million in earnings (40 cents). AMZN will probably have no problem meeting these lowered expectations, however the real issue will be its guidance for first quarter. The probability of another ratcheting down of expectations is a very real possibility.

Publicity stunt: Last week's announcement that AMZN had its best holiday season ever was a bit perplexing. The company reported it shipped 6.3 million items on 12/15 versus 5.4 million items the prior year, but why weren't the sales figures included? It sounded good, however it appeared almost like management was trying to hide something. What if its increased unit sales actually brought less revenue due to deep discounting? It is certainly a possibility, but a fact AMZN certainly wouldn't want let out of the bag at this juncture.

Bottom line: The stock's lofty PE ratio is insane. It would theoretically take 37 years at the company's current earnings to recoup your investment at today's price. If AMZN was still in an earnings growth mode, I could see a rationalization for a higher multiple, but AMZN sells discretionary goods in a time of economic turmoil, and I would not be surprised if it actually incurred an earnings decline in 2009. The stock deserves a PE closer to the 20 vicinity, and with 2009 estimates of $1.49, it equates to a $30 stock price.

Disclosure: Long MSFT, Short AMZN.

Comments

[seattleite:]

meh....seekingalpha articles are becoming more and more ordinary. Any Tom Dick and Harry can come and comment. The article has hardly any juice in it. I would like to be short Amazon, but the lack of any conviction in this article can deter any short. Mark, Sorry, we need some more conviction.

Jan 04 04:48 PM

[Urbane Gori...:]

I check the fundies of everything I trade, but really, in this market, they just don't have much of a bearing. Right now, I prefer technicals.

I just looked at he daily chart of AMZN, and **if** our little rally continues through Obama's inauguration, then I'd expect to see the DOW and SP500 move up, as should AMZN. Actually.. That would be about the time that I'd expect the average investor to realize that the XMas numbers no longer apply and the large investors to be selling off their profits.

However, right now, on the daily chart, I do see a second attempt at the stochastic 80 mark, a revitalization of the MACD and another +DMI cross of the 50 line... Albeit with no major volume. However, seems to me there is upside till about $59 or $60, then a probable short entry..

Thanks for the heads up... I'll keep it on my radar..... jegan ;-)

Jan 04 05:24 PM

[Jason22222:]

No meat on this short call. Take a look at free cash flow - AMZN looks a lot better on that metric. They made big investments in the past that are hitting the P&L as depreciation now, but free cash flow yield should be high single digits in 09. The operating leverage and economies of scale in their business model are tremendous. WMT is the biggest threat.

Jan 04 10:17 PM