Amazon's Short Future

Amazon.com (AMZN), once part of the fab four of internet, has since become a fallen angel. With profit margins shrinking to 3.25% and quarterly year-over-year earnings down 57%, the stock is over 40% off its 52-week high.

With its most recent earnings, Amazon stock dropped heavily and has bounced some 13% in the last couple of weeks. I would take this opportunity to sell this stock. Here's why:

Amazon is trading at a multiple of over 40. With revenues increasing at 20%, and negative earnings growth, that is a premium multiple, even for an internet company.

While Amazon is an internet company, it is really a retailer when it comes down to it. In other words, it should be treated like Sears (SHLD), Walmart (WMT) and Target (TGT) of the world. Those guys sport multiples closer to 20.

Barnes and Noble (BKS) released earnings today and they were good. This is one company that has always considered Amazon a competitor. If we are to believe that, then either BKS is worth a lot more, or Amazon is worth a lot less. I believe its the latter.

With management looking tired and distracted, earnings lacking lustre and shrinking margins, Amazon is in fact a good play on the short side. I believe the stock is headed to the low 20's and the recent bounce is simply what a friend of mine would call "a dead cat".

AMZN 1-yr chart:

Comments

[Yaser Anwar:]

I agree with you Faisal. Your take is like my recently published post on AMZN. While the spending to attain long term customers is all good, it is deteriorating the company's margins & mounting ALOT of Debt. While i love buying books & DVDs at discounted prices, i'm not sure it helps their margins. The discounts increase AMZN's shopping volume but i'd rather they sell less products at higher prices. The cool PDF styled book browsing is great but costs too much.

We will have to wait for next year when they launch e-books online. Till then, investors should steer clear.

I would go for: 1) Hedge Fund Strategy known as Market Neutral (same sector long/short positions) by going long on BKS 2) or buy october 23 puts

2006 Aug 18 12:05 PM