Short Amazon: Risky Investment at Current Price

In May, I wrote an article claiming that AMZN was overvalued. It was at that time, 79.79 per share. In the short term, I could not have been more wrong.

We know that share prices of companies are like voting machines in the short term and weighing machines in the long run. The enthusiasm about Amazon today is quite positive and voters are certainly signaling they want to own Amazon, at any price.

Yesterday, AMZN closed at 124.64 per share.

I'm going to upgrade AMZN from my last report in May. I had lower expectations of revenue growth. The recent quarter, they showed quite impressive revenue growth of 28% over last year's revenue in the 3rd Quarter. Very impressive to say the least. I hate to think the millions now unemployed who are home, collecting unemployment checks, are simply buying more stuff and not saving in the event they can't get a job when their unemployment runs out.

In my last report, I put AMZN at having a "fair" present value of 21.88 per share. I have recalculated a fair present value at 56.50 per share. I still remain bearish on the current price however and would recommend a short for non risk adverse investors.

First and foremost, the tech boom is over. Saturation of the market of households with internet access is near complete. Throughout the late 90's and for most of the 2000's, E-Commerce enjoyed fantastic year over year gains in sales as a higher and higher % of households began to have internet access, thus giving them access to companies that sold things over the internet.

The Federal Reserve provides us with the data on E-Commerce sales to better demonstrate the great sales gains in the early part of the 2000's.

Great stuff, until the market got saturated with homes having internet. In February of 2009, Nielson reported: More than 80% of Americans now have a computer in their homes, and of those, almost 92% have internet access, according to a detailed study on home internet access from The Nielsen Company, which reports that this number is up from 77.9% one year earlier.

I don't know exactly what the peak of homes having internet access will be, but we're nearly there I believe.

The bottom line is, the big growth that was seen in the 1990's and early to mid 2000's in E-Commerce sales is over. In order for Internet retailers to now grow their revenues, they must either steal market share from their competitors, gain sales from brick and mortar, or gain more customers. Let the competitions begin! I love this quote from this article here. "The Wal-Mart (WMT) CEO recently commented 'If there is going to be a 'Wal-Mart of the Web' it is going to be walmart.com.'" The E-commerce sales war will be interesting and margin tightening I can only imagine. (Capitialists who engineer the best distribution win. There is nothing wrong whatsoever with that. The men and women behind these businesses deserve to be rich.)

So what about Amazon's valuation today? Frankly, it's crazy in my opinion. Utterly overvalued. The expectations of 26% annual earnings growth over the next 5 years is asking for a lot in this environment. I do have a bias. For one, I'm currently short AMZN shares. Second, I do think we are headed for a "greater depression."

Let's take a look at my Stock Market Value Investing Analysis Worksheet below.

To start, a 5 year AAA rated bond will earn you more in income than AMZN is expected to earn in the next 5 years. That right off the bat begs the question, why take a risk in AMZN not meeting earnings expectations and simply taking the money you would use to buy shares of AMZN and park in a safe AAA Corp. bond?

I know that Amazon will not be liquidating itself in 5 years, so this is not a "cigar butt" type of investment. Amazon will be around for years to come. But in 5 years, at what price? What will Amazon be worth in 5 years I ask myself? I'll take the analyst estimate of earnings growth and assume that in 5 years, Amazon will earn $2.644 billion in 2014. In 2014, 5 years from now, I think AMZN will command a P/E multiple of 15, because I think AMZN can grow earnings 15% per year and I want to see the PEG ratio of 1.0. I think AMZN is worth about $24.4 billion in 5 years.

If I discount that at 10.21% (7% more than the 3.21% from a AAA Corp. Bond) per year or what I would demand for such a risky investment, I come up with a present value of $56.50 per share today. Much lower than the current price of $124.64, and this is after I've upgraded them. I've also given them the benefit of the doubt they can grow earnings 26% per year for the next 5 years. That 28% revenue growth this recent quarter really was impressive.

Amazon remains a highly risky investment at the current price. Due to the current price, I will remain short for both myself and the very few (luckily) clients who are short AMZN.

Disclosure: Putting money where my mouth is, short AMZN for self and few clients (2).

Comments

[southbeach:]

interesting perspective, and I somewhat share your skepticism about the sustainability of Amazon's current share price. conceptually though, there are some factors to consider which I don't think you've adequately addressed:

1. e-commerce market size is growing, and will continue to grow - hence it's not a zero sum game for leading ecommerce players - so if Amazon grows with the ecomm market, they could still grow earnings nicely
2. share of ecommerce wallet - Amazon is again well positioned to benefit disproportionately from their superior proven ability to execute and delight customers - launching new categories, and growing strongly in non $ denominated countries (e.g. € zone, Yen) which provides a strong lift to dollar denominated earnings, and taking more than ecomm market growth rate in overall share
3. leverage - Amazon and Walmart will be the players most likely to be able to leverage their scale to really crank the revenue handle - and generate strong bottom line growth, even on compressed margins.
4. International growth - see above - the weaker the dollar gets, the more international sales in stronger currencies boost earnings
5. Innovation - Amazon is pushing into some interesting areas (cloud, payments) which could further boost their reach and customer base. 'Owning' the consumer's transaction info - that crucial billing relationship, really aligns with the audience growth objectives of the core business.
6. Strong management - there are some very good long serving executives at Amazon who know the game very well, and this stability allows the company to continue their track record of above average execution.

So, I'm not joining your short trade just yet (there's a good chance of getting run over by the sentiment train right now), but I may do so once the post earnings party euphoria starts to fade.

Oct 27 06:24 AM

[Roger Knights:]

I doubt that Walmart will be much of a threat to Amazon on the web, anymore than Barnes & Noble has been. And consumers haven't moved to Internet shopping as fast as they've acquired Internet access. There's a lag of several years.

And Amazon isn't just a retailer; it has a footprint and early lead in cloud computing and e-books. Both of these are the wave of a tremendous future. And Amazon has an A++ leader in Bezos--he's tops.

Amazon has always attracted a great deal of skepticism and many shorts. Eventually they'll be proved right. Certainly if the market goes down 10% by year-end, as I expect, Amazon, with its high beta, will go down more. But other sectors are more dependent on an economic recovery and more highly leveraged on the downside, like banks and REITs. Those would be both safer and more profitable to short. Amazon is a treacherous short, because the company still has a lot of better-than-expected upside potential, and because it's so well run. Its high P/E is a short-trap.

Oct 27 06:31 AM

[Hayweed:]

AMZN's current stock surge reminds of RIMM which surged to ridiculous levels before diving over 50%. Rimm's growth was unsustainable and a new competitor emerged. Same thing is going to happen to AMZN since how long does it take to comparison shop on the web.

Oct 27 07:24 AM

[tmorris007:]

Mr. Tillberg has missed the key driver of future value for AMZN, the Kindle! While the stock may bounce up and down in the short run, long term it will be improving fundamentals that send it higher. Those fundamentals will be exponentially impacted by consumers adopting the Kindle as their primary reading vehicle.

My guess is Christmas and the fourth quarter will shine brightly on AMZN, due to blowout sales of the Kindle as a holiday gift.

I would bet the author's October's prediction will meet the same fate as May's.

Oct 27 09:16 AM

[rrtzmd:]

...hmmmmmm...are you sure you know what you're talking about:

seekingalpha.com/artic...

Oct 27 10:01 AM

[Jason Tillberg:]

All good points and are neccesary in order to see the 26% earnings growth. I do and did consider.
But it still does not justify such a high premium to both net tangible asset value and earnings.


On Oct 27 06:24 AM southbeach wrote:

> interesting perspective, and I somewhat share your skepticism about
> the sustainability of Amazon's current share price. conceptually
> though, there are some factors to consider which I don't think you've
> adequately addressed:
>
> 1. e-commerce market size is growing, and will continue to grow -
> hence it's not a zero sum game for leading ecommerce players - so
> if Amazon grows with the ecomm market, they could still grow earnings
> nicely
> 2. share of ecommerce wallet - Amazon is again well positioned to
> benefit disproportionately from their superior proven ability to
> execute and delight customers - launching new categories, and growing
> strongly in non $ denominated countries (e.g. € zone, Yen) which
> provides a strong lift to dollar denominated earnings, and taking
> more than ecomm market growth rate in overall share
> 3. leverage - Amazon and Walmart will be the players most likely
> to be able to leverage their scale to really crank the revenue handle
> - and generate strong bottom line growth, even on compressed margins.
>
> 4. International growth - see above - the weaker the dollar gets,
> the more international sales in stronger currencies boost earnings
>
> 5. Innovation - Amazon is pushing into some interesting areas (cloud,
> payments) which could further boost their reach and customer base.
> 'Owning' the consumer's transaction info - that crucial billing relationship,
> really aligns with the audience growth objectives of the core business.
>
> 6. Strong management - there are some very good long serving executives
> at Amazon who know the game very well, and this stability allows
> the company to continue their track record of above average execution.
>
>
> So, I'm not joining your short trade just yet (there's a good chance
> of getting run over by the sentiment train right now), but I may
> do so once the post earnings party euphoria starts to fade.

Oct 27 10:36 AM

[oghowie:]

Even AAPL looks cheap compared to AMZN. That should tell you something.

Oct 28 01:21 AM

[Richard Glenn:]

Shorting stocks based on valuation is a sure fire way to end up broke eventually. Yes, you may be right in the long term, but without very deep pockets there is a good chance that you will be busted flat before the "inevitable" decline.
If you want to bet against Amazon, use options -- here's one way: seekingalpha.com/artic...
For a more complete rebuttal, see my article on Amazon here:
seekingalpha.com/artic...

Oct 28 01:42 AM

[Brad Castro:]

AMZN is a dominant retailer with virtually no debt on the books. And they're going to be a dominant retailer for a long time to come.

But I agree that it's unlikely that AMZN is going to continue trading much higher in the short term (30 days). Still, I wouldn't short any dominant, well run business no matter how "overvalued" I thought it was.

Oct 28 07:01 AM

[Paul Zimbardo:]

Agreed. I do not follow AMZN actively anymore but shorting a stock that is "in favor" is always a recipe for disaster.


On Oct 28 01:42 AM Richard Glenn wrote:

> Shorting stocks based on valuation is a sure fire way to end up broke
> eventually. Yes, you may be right in the long term, but without very
> deep pockets there is a good chance that you will be busted flat
> before the "inevitable" decline.
> If you want to bet against Amazon, use options -- here's one way:
> seekingalpha.com/artic...
>
> For a more complete rebuttal, see my article on Amazon here:
> seekingalpha.com/artic...

Oct 28 09:26 AM

[Harry Tuttle:]

AMZN is a great company with a bubble stock. Most people who buy their shares do not understand even basic accounting, they only care about "the story" which is an intangible impossible to prove or disprove.

If you want better examples of valuation disconnect, you can pick from any of the following worthless securities: FNM, FRE, AIG, Lehman (don't remember the symbol), etc.

Even the CEO of GM could not convince the day-traders that his own stock was worth nothing.

The fool and his money are lucky to get together in the first place.

Oct 28 09:49 AM

[Options Tra...:]

i must agree with you. after such a strong gap up, a short term pullback to about half the distance or lesser seems inevitable indeed.

Oct 28 11:28 AM

[ZeroCred:]

I wish you luck on shorting this name. You will join the ranks of many before you with much deeper pockets that thought 30x next year earnings was rich that were vaporized. The problem is that it takes very little for 30x to go to 35x. You can attempt to time this perfectly but its akin to picking up nickels on a train track; sometimes the last thing you see is a big white light.

Oct 28 10:23 PM

[osiso:]

somewhere henry blodgett is thinking he needs to put a $600 target on AMZN. 10 yr growth for AMZN= 45%! i can't believe it either but its true. so can AMZN sustain 25% growth for the next 5 years, let alone 45% like it has done. Ebay, Yhoo, have not been able to do this.

I don't buy Kindle growth is going to tak this stock up like one of the messages stated.

My guess is that AMZN will be under $100 by December. Long term.....Henry Blodgett may be right after all....16 yrs after his call

Oct 29 12:31 AM

[elliotz:]

Amazon is a great company and will be around for a very long time. The problem is with the stock not with the company. The stock has very rich excpectations built into it for the company. Unfortunatley if AMZN disapoints but still has good growth of 10% in revenue the stock will tumble. AMZN was the first to get into e-readers(they deserve their due), they also proved that e-readers sell and there is alot of room for sales growth in that segment. Many are following them in. BKS has just came out with a statment that theyr NOOK e- reasder is selling better then excpected. APPL will surely follow suit and so might microsoft and well as others. This is the moment story stock after a great quater. Way to overvalued at these levels. I am short AMZN using derivatives.

Nov 10 08:10 PM

[thrader:]

Amazon is one of the greatest companies to short at current levels. Have you heard of the phrase: "the last idiot isn't born yet"?
Well, it's true, hence you see amzn trading at these ridiculous levels. The sp pushes up with ever lower trading volume, lol.

On Nov 10 08:10 PM elliotz wrote:

> Amazon is a great company and will be around for a very long time.
> The problem is with the stock not with the company. The stock has
> very rich excpectations built into it for the company. Unfortunatley
> if AMZN disapoints but still has good growth of 10% in revenue the
> stock will tumble. AMZN was the first to get into e-readers(they
> deserve their due), they also proved that e-readers sell and there
> is alot of room for sales growth in that segment. Many are following
> them in. BKS has just came out with a statment that theyr NOOK e-
> reasder is selling better then excpected. APPL will surely follow
> suit and so might microsoft and well as others. This is the moment
> story stock after a great quater. Way to overvalued at these levels.
> I am short AMZN using derivatives.

Nov 11 07:02 AM