Amazon's A Momentum Darling; Here's 12 Reasons That Momentum May End

| About:, Inc. (AMZN) (NASDAQ:AMZN) has a largely deserved reputation for being "the" online marketplace. It earned this reputation many years ago and since then it has been a Wall Street darling. It has been designated a "momentum" stock and its value has been run up beyond all reason. Its FPE is 75, and that number is highly questionable. It now trades at roughly a 10-fold premium to most of its retail peers. Does any stock deserve this kind of valuation? I would argue that no stock does. As a counter many would argue that AMZN has managed to achieve this over valuation successfully for years. I can argue fundamentals to that, but it is hard to deny the reality of AMZN's over priced history. The only strong argument against that is that AMZN's situation is significantly changing. Below I detail 12 reasons AMZN's situation may be changing for the worse.

1. On April 22, 2013 the US Senate voted 74 to 20 to allow the Marketplace Fairness Act (the Amazon Law) to come to the Senate floor for an up-or-down vote. The margin of this vote implies that the legislation will eventually pass. With a GOP controlled House, the bill is sure to pass the House, if it passes the Senate. Since this bill will allow states, counties, and cities to acquire more sales taxes (allow taxes on internet and catalog sales) without politicians actually having to approve any "new taxes", this should be a politically popular tax. The time for this bill to pass would seem to have come. In many states such as California this would likely mean a roughly 9% (including county and city taxes) price increase for the cost of the goods Amazon is selling. Some argue that the Marketplace Fairness Bill will help AMZN forestall new competition. For very small competitors this might be the case, but for large competitors, it will provide AMZN with no advantage. It will instead hurt AMZN's price comparisons to brick and mortar retailers. Plus, the extra expense of handling the taxes will cut into AMZN's already thin margins.

2. eBay (NASDAQ:EBAY) has recently thrown its hat in the ring as a direct competitor to AMZN. On March 19, 2013 eBay debuted a new fee structure and incentives for sellers in a clear attempt to take some of AMZN's third party business. A comparison of eBay's fee structure compared to Amazon's is below.

Although the comparison categories are not exact, eBay is trying to beat AMZN on fee costs. This is sure to hurt AMZN margins in the future. eBay is no small competitor. It has a market cap of $68.60B versus AMZN's $122.17B.

3. Google (NASDAQ:GOOG) announced on Thursday March 28, 2013 that it was entering the same-day delivery market with Shopping Express. This is a new service that GOOG is beta testing in the SF Bay Area. If you are accepted as a beta tester, you will get same-day delivery free for six months. Shoppers (beta testers) can order same-day delivery of goods from GOOG partners in this enterprise: Target, Walgreen, Toys R Us, American Eagle, Staples, Office Depot, Blue Bottle Coffee, and a local grocery store and toy store. Questions asked of beta testers indicate GOOG is probably planning to test new smartphone apps for this new GOOG business. If these apps are a winner, this could help GOOG be successful in this area. Followers of GOOG know the beta testing indicates that it is a virtual sure thing that GOOG is entering this market. GOOG has become a significant competitor in virtually every market it has entered. GOOG has a market cap of $268.81B. It is no small competitor.

4. Wal-Mart (NYSE:WMT) is also entering in the same-day delivery space. WMT intends to compete directly with Amazon's new Amazon Fresh same-day delivery, which is currently only available in the Seattle area. WMT already has much of the infrastructure for this, whereas AMZN will have to build it all for perishables such as groceries. WMT's timely (for WMT) entry into this market is likely to be extremely costly to AMZN margins in the near term as AMZN tries to implement this new service. WMT also already sells a huge number of items of all kinds. It has a great supplier network, which supplies it with low cost goods. It more often than not has lower prices than AMZN and that was before you added taxes to AMZN's cost to the consumer. E-commerce is growing at 11% per year, but sales for consumer packaged online goods such as food and groceries are growing at almost 20% per year. Since people already shop at WMT brick and mortar for these items, WMT should have the inside track in this area. This means AMZN will suffer lower margins.

WMT had $469B in revenues in 2012 versus AMZN's $61B. It is no small competitor. It should worry AMZN and AMZN's investors greatly. Since WMT's growth has been relatively low in recent years, an investor has to realize that WMT intends to use online sales to stroke its growth. It will put huge amounts money and effort into succeeding in the online area. It assuredly will. The only question is how much of AMZN's business WMT will take.

5. AMZN insiders and institutions are selling AMZN stock. They aren't abandoning it yet. However, insiders sold -1.3% of their stock in the last six months. Institutions sold -1.56% of their stock (-4,739,950 shares) in the prior quarter to the latest quarter. They may want you to believe they are not selling, but they may only want to make sure they get their profits before the rush to the door begins.

6. AMZN had negative GAAP net income of -$39 million for FY2012. Even in its traditionally most profitable quarter, Q4, it earned only $98 million in 2012. This means that its already razor thin margins will likely lead to losses in some 2013 quarters. In fact the average analyst's adjusted earnings estimate for Q1 2013 has decreased from $0.34 per share to $0.09 per share in the last 90 days. AMZN's GAAP net income could easily be negative for any or all of the first three quarters of 2013. In fact, AMZN itself gave operating income guidance for Q1 of between (-$285 million) and +$65 million. The midpoint of this guidance is (-$110 million) - a loss.

7. The EU economic crisis / credit crisis is worsening. The chart of the Eurozone Retail PMI (most recently 43.7 in March 2013 - a ten month low) shows a clear downtrend since the beginning of 2011 (see chart below). EU unemployment recently reached 12.0% for the first time in the Euro era.

In the most recent month (March 2013) France's Retail PMI fell to 40.1, which is below even that of Italy at 40.3. Both readings indicate severe contraction. AMZN derives a significant portion of its income from Europe. This part of the business will get hurt in 2013. Even BRIC and other emerging market economies are slowing down. For instance the Chinese GDP growth for Q1 2013 missed recently at +7.7% versus an expected +8.0%.

8. AMZN's operating margins have been steadily decreasing for the last three years: 4.4% in 2010 to 1.9% in 2011 to 0.9% in 2012. It is hard to argue with this trend, and it is a very negative trend.

9. The US federal government hiked payroll taxes by +2.9% (plus other taxes on the rich) for the average US citizen in January 2013. The average US citizen probably has at least 80% of his/her salary spent on relative necessities before that salary is received. This means that a loss of 2.9% to higher taxes of the approximately 20% unspent on necessities will be a ballpark -14.5% less that consumers will have to spend on AMZN's goods, which are for the most part discretionary. This is sure to negatively affect AMZN's top and bottom lines. Further, it is not just AMZN that this tax hike will affect. There will be a negative economic multiplier effect.

10. The sequester was put into effect at the beginning of March 2013. The CBO estimated that this will cost the US -0.6% in GDP growth in 2013 and it will lead to the loss of 750,000 US jobs. Those 750,000 people are not likely to buy much from AMZN. Again, there may be an economic multiplier effect.

11. AMZN's new fulfillment centers all cost money to run. On a percentage of revenues they likely cost more to run in non-busy quarters such as Q1 2013 than they do in Q4. This means that margins seen in Q4 2012 will almost assuredly go down in Q1 2013.

12. AMZN missed on revenues in Q4 2012. It has also missed on EPS badly for the last three quarters running (-50.0%, -650%, and -25.0%). It might be wise to sell before earnings for Q1 2013. It is unlikely margins will expand in the Q1 2013 report (after hours on Thursday April 25, 2013). AMZN may miss again and there seems to be little that will compensate for that. In fact, you may see revenue growth slow considerably, especially from the EU. If a lot of this is 3P sales, you could see significant margin contraction too.

I could go on, but I believe I have made my point. Some might say the brokerage houses and the boutique brokerages still give this stock great ratings. My reply is that they typically run up a "momentum" stock as far as they can. Then they let it crash. Keep in mind that some of these stock raters such as Evercore Partners are huge HFT (high frequency trading) houses. They often make millions in the day or week after their ratings increases. Their self interest is obvious. I am only surprised that the SEC has not acted to curb this kind of thing yet. Major brokerage houses do large amounts of both HFT and momentum trading. They too like to make huge amounts of money on very questionable upgrades of "momentum stocks". Eventually they let the stock crash. This quarter could be a time that they let AMZN crash, although it is not likely that they will let it fall to 25% or less of its value based on Q1 2013 earnings data. Still, this might be the beginning of the almost certain ride downward.

Overall indicators are that AMZN may soon be a stock to crash to 25% or less of its current value. I would advise you not be invested in AMZN. The odds that this will happen in 2013 are increasing daily. The news from Spain today was that unemployment had reached 27.2% in Q1 2013. This is still a worsening situation that is bound to lead to further banking problems (bad loans) and real estate problems in Spain. If Spain fails (or nearly fails), these problems may spread to the rest of the EU. This would impact the US economy more significantly.

Both Apple (NASDAQ:AAPL) and Qualcomm (NASDAQ:QCOM) recently gave weak guidance. These two have in recent years been darlings of Wall Street. If they can fall after weak earnings guidance, a company with an outrageous valuation (by comparison to these two) can easily fall on weak guidance, and the above reasons should provide more than adequate reason for weak AMZN guidance for 2013. If you add weak PC sales data and bad guidance from AT&T (NYSE:T), which took down the internet equipment suppliers, you get a weak outlook for the electronics part of AMZN's business. There are really only so many negatives one company can absorb without experiencing significant problems.

The two year chart of AMZN provides some technical direction for a trade.

The slow stochastic sub chart shows that AMZN is neither overbought nor oversold. The main chart shows that AMZN has been consolidating for all of 2013. If anything there seems to be a downward trend to this consolidation. I don't see how the above "real" data can lead to a hugely positive scenario for AMZN for 2013 (or for years beyond 2013). The "big" competition is mounting. There are no significant barriers to entry for AMZN's business. The "big" competitors seem sure to take portions of AMZN's business in the near future. Trying to forestall this will almost assuredly hurt AMZN's margins. Reality seems sure to hit AMZN in 2013. It is time to take profits in AMZN if you own it. If you are an aggressive trader, you may wish to consider shorting AMZN. With retail sales floundering in the US and the EU, the risk of loss by shorting AMZN seems minimal.

NOTE: Some of the above fundamental financial data is from Yahoo Finance.

Good Luck Trading.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.