Why I Remain Short Amazon

Amazon (AMZN) delivered nice results, but let’s face it, they were not fantastic enough to justify propelling the share price 20%. I admit, I got my head handed to me on a plate, as my 800-share short position caused some serious hurt. I guess I drank too much of Broadpoint Capital’s Analyst Tim Boyd’s bearish Kool-Aid, but as a consequence of the violent run up, I think the shares have become even more overvalued.

I am stubborn and will hang on to my short position until profit taking hits, and knocks the stock down to more realistic levels. The stock ran up more in one day than the company is expected to earn in the next five years combined. Its insane multiple of 40 times 2009 estimates of $1.48 borders on calamity. I realize that AMZN deserves a higher multiple, since it is one of very few stocks still generating earning growth, but more in the range of 20-30% higher, not 100% or 200% loftier than such names as RIMM, AAPL, MSFT, EBAY , CSCO and INTC, averaging about a 15 PE multiple.

Fourth quarter was good, but not that good; when the company issued fourth quarter guidance back in October, it comprised a large range. Sales guidance was $6 billion to $7 billion, while its operating earnings forecast was $145-$305 million. Well, AMZN didn’t even end up surpassing the top end of its revenue guidance when it posted sales of $6.7 billion (they came in the top 30% of the range). AMZN also came in within the top 30% of its earnings range, prompting the question: What is all the fuss about? I just don’t see how the market construed this as a beat? Am I missing something? Could it be excitement about Kindle sales? Bezos made it clear the Kindle reader was attracting strong demand, but refused to provide details. Is this a “pump and dump” scheme?

First quarter guidance was sketchy: AMZN is supposed to be a “growth stock”, yet its low end guidance for its first quarter indicates a falling off as much as 37%. AMZN’s operating income guidance is so wide, you could sail an aircraft carrier through it, comprising a range of $125 million to $210 million. The top of the range is 85% higher than the bottom. When it comes to its revenue guidance range, it is much tighter. The spread of $4.52 billion to $4.92 billion, represents the top end, at only 10% above its starting range. Growth stocks are not supposed to see earnings declines, and AMZN will make sure “at all costs” it avoids this calamity. My best guess is, they will repeat their 4th quarter scenario by coming in within the top 30% of guidance ranges in both sales and earnings, delivering sales of $4.8 billion and earnings of $185 million.

Gross Margin issue: If you compare gross profit margin on a year to year basis (4th Q 2008 versus 4th Q 2007) its decrease does not seem that alarming - dropping only 50 basis points from 20.6% to 20.1%. The decrease represents only a 2.5% reduction. However, if you compare AMZN’s gross profit margin sequentially, the picture begins to look bleaker. The fact is, AMZN produced a 23.4% gross profit margin in its third quarter. In just one quarter, AMZN incurred a 350 basis point loss to its gross margin, signifying a 14% overall deterioration. That is significant when you consider new services with very high margins, such as music and video downloads, seem unable to slow the margin erosion. Remember, AMZN is a retailer, and gross profit margin to a retailer is like fish is to a fisherman, "sacred."

Bottom line: The shares have simply gone up too far in too short of a time frame and are due for a nice dose of profit taking, as longs begin to ring the cash register. The stock also received some nice upward momentum due to massive short covering, but this covering will soon begin to abate. When reality finally starts to set in and the “giddiness” over the quarter evaporates, the stock will sink to a more appropriate multiple. Hopefully longs will have the sense not to get too greedy and use this recent strength as a selling opportunity, before their gains turn quickly into losses. Don’t get me wrong, I think AMZN is an extremely well managed company, with tremendous prospects. It is just too pricey.

Disclosure: Short AMZN

Comments

[bricki:]

I'd like to play poker with you.

Feb 02 10:07 AM

[drone:]

With only 800 shares on the table you are not going to make much off of him. You need to find a bigger fish.


On Feb 02 10:07 AM bricki wrote:

> I'd like to play poker with you.

Feb 02 10:25 AM

[Jake Berzon:]

I agree that Amazon shares appreciated much too fast from their November 2008 lows and especially with their last leg up to warrant a move down, but I just don't see how it makes sense to short one of the few companies that has what it takes to emerge a winner on the other side of this recession.

Wouldn't it make sense to choose a short target that has poor fundamentals and is making a technical top? That's what some of the more successful short sellers were doing with financials last year.

Feb 02 10:25 AM

[Network Effect:]

Why would you base your trading decisions on fundamentals or P/E? It's all about the charts, and Amazon is going through the roof as shorts get squeezed.

Feb 02 10:35 AM

[Tom Shohfi:]

I agree with you that AMZN does, and has for several years, look expensive given its relative valuation compared to other tech growth companies - but - there are a lot of intangibles on that balance sheet. First, a highly complex infrastructure that's also being used to deliver one of the best cloud computing offerings in the marketplace. Relationships with tons of small vendors that help AMZN reduce costs and increase their product offerings. Immense brand value - $6.5B according to Interbrand's annual report. It also has a strong, generally very bullish sell side following that does a lot of pumping.

That doesn't mean that the valuation makes sense. eBay's brand value is $8B and it trades at less than 9x trailing EPS. Seems dirt cheap compared to AMZN. Yet AMZN, until the latest quarter report, has tracked the NASDAQ pretty consistently. The expectations of the last quarter, with a weaker consumer, had apparently fallen too much. that 8% EPS growth was more than enough to satisfy investors in this environment.

Feb 02 10:39 AM

[Network Effect:]

$60+ - going to $90!

Feb 02 10:45 AM

[Alex Filonov:]

You put yourself in a hole and continue digging? You can try to cover your position hoping for the gap filling, but that's about all. AMZN yet might get hurt by slowed consumer spending, but it takes business from brick and mortar retailers, and its model is more efficient.

Feb 02 11:39 AM

[Roger Knights:]

Five years from now, Amazon is going to be way higher. So I wouldn't bet against it now. (I almost posted a comment on the author's previous article, the one where he said he was going short, imploring him not to do it.)

Feb 02 02:57 PM

[Forex:]

Cover your short and just take it on the chin. for the guidance, just focus on what the midpoint implies because that is where the street will focus. Also, not good to compare Amazon's business on a sequential basis because of the seasonality of the business - only year-over-year. Even the working capital and cash balances are seasonal.

Feb 02 04:04 PM

[Timeline St...:]

You don't have the best timing, do you?

I mean, I realize what you are saying.....but you are fighting the market, which is rule #1. As in, don't fight the market.

You use a lot of flowery words and fundamentals to justify your position. Don't. There is zero correlation between degree of performance and this stock price. The market asked, "Profit?", Amazon said, "Yes!" and the rest was history.

Take your lumps and move on. Don't keep trying to justify an indefensible position.

Feb 02 04:38 PM

[Mark Krieger:]

the position merely represent a hedge or insurance against my long positions--Since 80% of my holdings are long and 20% are short, I do not mind seeing AMZN rally, as that means my long posiotns are also getting juiced up. AMZN is still very risky, if the macro economics continue to slide--consumers are not going to be thinking of books or trinkets to buy---thet are going to be in survive mode..A 40 PE in the market is too rich for logic.


On Feb 02 04:38 PM TimboM wrote:

> You don't have the best timing, do you?
>
> I mean, I realize what you are saying.....but you are fighting the
> market, which is rule #1. As in, don't fight the market.
>
> You use a lot of flowery words and fundamentals to justify your position.
> Don't. There is zero correlation between degree of performance and
> this stock price. The market asked, "Profit?", Amazon said, "Yes!"
> and the rest was history.
>
> Take your lumps and move on. Don't keep trying to justify an indefensible
> position.

Feb 02 04:51 PM

[Marcap:]

"I'd like to play poker with you."

Me too! I'm confident that it would be a much easier way to make money than betting on the markets these days. Then again he may not have much money left to bring to the table, especially after he has to buy Amazon at $80 or so to cover his short position.

Feb 02 05:21 PM

[Louie Junior:]

Using my dumb money metric and the unanimous dissent voiced here -- I believe the author is correct.

It is overvalued in spite of the fact that earnings and revenues are growing.

The same comments above, would undoubtedly have been made, even if the share price had jumped to $100 or $200.

Feb 03 08:59 AM

[Happy Harry:]

I agree with Mark. Amazon is way too high. The multiples are sick. How about their returns which will start hitting their numbers. They have not been reported yet because customers had until January 31st to return the products for a full refund. I don't know of any retailer or etailer that didn't get hit with a lot of returns after the holidays.

Feb 03 11:32 AM

[Happy Harry:]

I agree with Mark that Amazon is ready for a fall. Yes, they had good earnings for the quarter but how about returns. Amazon's return policy was valid thru January 31st for a full return. I don't know of any retailers that didn't receive a return after the holidays. When will they be recorded (next earnings)? Expect a fall and a big one. No retailer is immune from these economic conditions.

Feb 03 11:35 AM

[drone:]

People read more books during a recession. They read books on how to get rich in the next bull market and they read more fiction to take their mind off the current situation. Amazon has good deals on second hand books and lots of other reasonably priced stuff. I'm not driving to the bookstore, I'm staying home with my computer and credit card.

Feb 08 06:39 PM