Amazon Earnings Preview: How Long Before the Jig Is Up?

You know the routine: under promise so you can over deliver. Management has taken a play right out of AAPL’s playbook in managing guidance in order to please the street, but will the Street get wise to AMZN’s antics? Probably not - Wall Street has been pretty gullible lately.

Revenues: management gave guidance that first quarter sales would range from $4.52 billion (9% rise) to $4.92 billion (19% rise). The Street ‘s consensus was not too scientific –it simply averaged the range to compute its $4.76 billion forecast, but AMZN will likely reach the top end of this range. Management would have never given a top end number in the first place, as if they had any doubt at all, it was not achievable.

Earnings: management offered a substantial 4300 basis point range between its low and high estimates, resulting in as much as a 37% decline in earnings to as high as a 6% rise. Last year’s first quarter produced sales of $4.13 billion and earnings of 34 cents. If you run the numbers, earnings results could range anywhere between 21 and 36 cents. Last year’s first quarter produced a 23.20% gross profit margin, but fourth quarter results generated only a 20.1% gross profit margin. If the company can show no further margin erosion, its results will likely please the street with earnings as high as: 36-38 cents, substantially above the 31 cents they are expecting. On the other hand, if AMZN shows a sequential profit margin drop below 20%, earnings could fall below expectations, prompting an immediate 20% clearance sale.

Is the good news already baked in? It is likely that most of AMZN’s good news is already reflected in its share price, as its stock has more than doubled in the last 5 months, selling at nearly 54 times 2009 estimates and 43 times 2010 estimates. I think the market is pretty much discounting all the good news and what you just might see is the typical “sell the news” scenario. Citi’s recent upgrade as well as the technology research firm “isuppli” touting Kindle’s fat profit margins has ratcheted expectations substantially higher the past few days. This hype could come back to haunt Amazon, especially if the shares hit the skids.

Low return on investment: If you buy the shares at $82 and they earn $1.51 per share during the year, Finance 101 dictates your return on investment (yield) is a meager 1.84%. You can obtain a better return than that, in a risk free CD at your bank. The stock is certainly on a roll, and might be tempting for a gambler to chase, but should be avoided by value oriented investors. My point is, the higher the shares rise, the riskier they get and the higher the probability it will be necessary to unload them to an even 'greater Fool'. Sooner or later the music will stop, and you don’t want to be left holding an empty bag when there are no buyers left.

Disclosure: short

Comments

[Anthony B:]

I tried shorting them last week, but covered yesterday at an $81.35 stop loss. From your other articles it's good to hear that you're only shorting AMZN as a hedge against your long positions. I agree that their price is irrational, but do you have a stop-loss in place just in case?

Apr 23 09:06 AM

[Mark Krieger:]

No--I'm not that logical..

Apr 23 09:15 AM

[donzoab:]

Unfortunatly for those that like to look at realistic earnings multiples, you will never own AMZN. Like trying to buy MSFT in its begining, strong dominant growth stocks always have the highest multiple. One day you will be right, but not today. While you short or avoid the stock you also run the risk of limiting your returns. CD's might actually be right for you.

Apr 23 09:26 AM

[optionboy:]

Look closely for accounting tricks to make earnings, non-cash sale of dvd unit, lowering tax rate, share buyback. Amazon has a bag of ticks to make things look better, but the street lets them get away with it.

Apr 23 09:36 AM

[optionboy:]

Amazon should change it name to Accounting tricks - R - Us, since they know most people don't read the details

Apr 23 09:38 AM

[Anthony B:]

->if you short the stops won't work because the stock will gap higher.

It depends how you set up the stop. Setting it up as a conditional order to sell when the stock is above a certain price will still get triggered after a gap up. It might be quite a ways higher than were you set the conditional, but you will still get out of your position.

The order that gets triggered by the conditional can either be a market order, or limit. If you make it a limit, set it to mark + [at least double the value of the bid-ask spread] to make sure your order doesn't get skipped over.

Apr 23 02:02 PM

[asceptic:]

With Amazon's p.e. ratio in the fifties going into a serious business downturn, this mere seller of books and other low margin merchandise must be the most overvalued stock on the planet. The only time that stocks got away with those sort of multiples was back in the tech boom and we all know how that ended.

Apr 24 12:26 PM

[seattleite:]

Hello Mark,
How are you doing ? How are your Amazon shorts doing. So lets see you shorted on around 1400 stocks Jan 4 around 50. Then you published 1 article every 2 weeks ( making seekingalpha a propaganda platform rather than an information medium ) trying to persuade/beg people to short more or to sell what they own.

When AMZN announced 2008 Q4 results, you still continued whining and on the day of the result you were down 10K. I told you, you will cover at 80. I was wrong, seems like you will cover at 86.

Now 3 months later, you still continue whining, losing what, like 50K. Hope that the stress tests results are horrible so that the market goes down tremendously so that you can cover around 10K lower.

Stop it. Cover. Move on. Stop trying to use seeking alpha for your personal propaganda.

Apr 24 01:33 PM

[alancelt:]

AMZN recently reached my target of $85 from its inverted Head & Shoulders formation. There is considerable resistance in the $90-95 range. With adverse fundamentals, technicals and economic conditions it is a reasonable short here, however it has also always been a dangerous short so be careful with it. Upside target $95, downside target $60 (to the H&S breakout level).

Apr 28 11:06 PM

[Stez:]

If you want to short why not buy a long dated out of the money put.
Thereby you set a stop with regard the amount of money
you have at risk. At some point they will be found out and gap lower
and you have a time frame to exploit it if you are right.

Its the method that Nick Taleb (Black Swan) uses so that when some sense returns to the market with regard this stock's valuation you make some money if correct.

May 08 07:58 AM