Short Amazon: Poor Relative Strength

In the last six weeks, the Dow has risen 15% while Amazon (AMZN) has fallen about 10%, (that represents a staggering 2500 basis point difference) AMZN’s poor relative strength should be a concern to longs that further price erosion could be right around the corner.

What is driving the shares lower? Obviously, there are more sellers than buyers, but digging deeper, a few possible scenarios are:

1. AMZN’s shaky second quarter earnings report which saw revenues come in on the light side.
2. The market could be under the perception that AMZN paid too much to acquire Zappos.
3. Its Officers and Directors have been on a selling spree (not exactly a confidence builder for perspective investors). CEO Jeff Bezos dumped 2 million shares on the market when he sold three blocks of shares comprising of two 800,000 share blocks and one 400,000 share block (comprising about 2% of his ownership). This type of aggressive selling produces a tremendous amount of supply for the market to absorb all at once.

Besides Bezos sales, insiders such as Kessel, Blackburn, Jassy, Wilke, Wilson and Piacentini dumped about 65,000 shares after being granted the shares as part of their compensation. The trouble with the granting of shares is it creates more shares and produces earnings dilution. In the last year alone, AMZN’s outstanding shares increased 5 million from 446 million to 551 million. You would think AMZN’s share count would be dropping, not going up, especially considering they have a stock repurchase program in effect.

Some light at the end of the tunnel: To be fair, AMZN certainly has a few bright spots that need to be mentioned. First the company was able to improve its gross profit margin 50 basis points from 23.8% to 24.3% despite being caught up in a “price wars mentality” sales environment. Secondly, AMZN bumped its sales up by a notable 14%. AMZN’s cloud computing and Kindle prospects also look promising.

Third Quarter guidance is sketchy: AMZN’s guidance range is so big you can drive a truck through it. Its third quarter sales range of $4.75 to $5.25 billion gives the company a staggering $500 million worth of wiggle room to play with, equating anywhere from a 11-23% sales gain. The company’s guidance on operating income is even wider, slated at $120-$210 million, representing anywhere between a 22% decline and 36% rise. The swing between the low and the high is a mindboggling 5800 basis points, dwarfing the range of AMZN’s sales guidance range of only 1200 basis points. The bottom line is: management is very good at under promising in order to over deliver, so you can rest assured that management will deliver at the very top of their guidance ranges.

Bottom line: There is no doubt AMZN is a great company with tremendous potential. The trouble is, the shares are just too expensive and need to selloff to the low $70’s before they become attractive once again. Going short at this juncture seems like a logical way to exploit this stock’s potential decline.

Disclosure: Short AMZN.

Comments

[zrk:]

I wouldn't read too much into the execs selling their stock. They are all required to be on 10b5-1 plans, which means that they make a decision to sell quarters or years before the actual sale, regardless of market conditions. Considering that equity is a very important component of executive compensation, it makes sense that they would sell their stock from time to time--what sophisticated investor wouldn't diversify from their employer's stock?

Aug 24 02:58 PM

[Mark Krieger:]

Yes..I have been running down to Walgreen's too often to restock my Preparation H supply--I have been wrong on this one big time, but every dog has his day!


On Aug 24 01:14 PM rrtzmd wrote:

> ...HAW!...man, you ARE a trip!...how far down are you on AMZN since
> your January article?...let's see, with AMZN at around $48 in November,
> 2008: "Amazon: Don't Fall for Fool's Gold"...then January: "Amazon.com:
> Possibility of E-Commerce Sales Tax Makes It a Short"...followed
> 2 weeks later by:
> " Amazon: Guidance Miracle Is Not in the Cards"...followed in March
> by: "Amazon's Rich Valuation Defies Logic"...followed in April by:
> "Amazon: Dirty Little Secrets Persist"...followed two weeks later
> by: "Amazon Earnings Preview: How Long Before the Jig Is Up?"...and
> now AMZN's around $85???...HAW!...I wonder how much you spend a week
> on Preparation H!
>

Aug 24 10:10 PM

[seattleite:]

fool yourself once shame on you fool yourself twice more shame on you fool yourself as many times AMZN has fooled Mark Krieger...lock yourself up in a room and never come out. Oh wait you will have to revisit Walgreen's to get the H supply...lol
Hope you covered before todays earnings report...

Oct 22 05:22 PM

[Mark Krieger:]

no question ---i was terribly wrong on this one and paid dearly for the error of my ways...Fortunately I recovered some of my AMZN losses on BIDU's drop today.

Oct 27 12:10 PM