Amazon: Be Fearful While Others Are Greedy

Investors have a short memory. They tend to follow the herd into the flavor of the month club and Amazon (AMZN) proves to be no exception. Some could argue its valuation is approaching bubble status when calculated at 52 times 2010 earnings estimates of $2.53 and 16 times book value. Looking deeper at this, the $2.53 earnings figure, which represents impressive growth of 35%, could be too low. If they earn $3.00 for a 60% improvement, the forward multiple falls to a more reasonable 40 times earnings; after all, stocks with higher growth are rewarded with higher multiples. This is a compelling argument to why Wall Street is hanging its hat on the premise that AMZN’s current estimates are indeed too low.

Potential dangers: The market seems to be putting its head in the sand regarding potential AMZN landmines. The threat of an impending internet sales tax, Walmart’s pledge to start an all out price war and the slew of competitors getting into the EBook reader business has swayed most analysts not to show caution. Everybody seems to be bullish on this one, and when market sentiment is this one-sided, tops are usually imminent.

Short position abating: AMZN’s short interest dropped 10% to 17 million shares (about 3.9% of outstanding shares) in the last period, so there will be less short fuel available to keep the upside momentum intact. I would think these very overbought shares could be susceptible to a correction through profit taking and fall as much as 10% before buying support reemerges. The fact is the stock has gone up too far in too short of a time frame and needs to at the very least, pause to refresh.

Analyst take: Since October, all four analyst actions have been positive ,yet AMZN’s share price is still 4% higher than the analysts one year median price target of $125. This fact alone, should set off some warning bells to stay clear of this one. Who knows when the music will stop and everyone tries to hit the exit doors at the same time. The risk certainly outweighs the reward at this price level.

My take: I admit my track record on this one has been horrendous, but every dog has his day and eventually AMZN will disappoint, and when it does, the shares will literally implode. That is the time when you want to be short. Easier said than done.

Disclosure: Short AMZN.

Comments

[Michael Shu...:]

It is clear you are not an Amazon customer nor do you speak with them. Superb site, superb selection -- in the past month I have bought books, coffee, china, telephones, coffee maker filters, tee shirts, printer cartridges and toiletries from them. No tax -- and no one will be able to impose one - and no shipping charges, I am an Amazon Prime customer. Did I mention I own a Kindle? And through the Kindle I have canceled one newspaper and three magazine subscriptions, replacing them with Kindle versions and now buy 75% of my books for the Kindle. Including my own, Sell Short (published by John Wiley) - I write a newsletter on shorting stocks. I have also sold three used books through them this past month. Please, talk to more customers -- troll their site - and, more importantly, look at their cashflow and average number of orders and order size per customer. Did I mention UPS and Fedex are looking at 8% increases in shipments in Q4 due to online sales? Guess what company will lead the way?

Nov 12 08:50 PM

[Anthony B:]

What if AMZN continues to grow at 10% a year, and just remains overvalued forever?

Nov 12 09:41 PM

[Beyond Trading:]

We disagree 100%. Most of you retail investors have been saying exactly the same since Amazon was $50. No data, no fundamental analysis, pure speculation on the short side responsible for large losses among retail investors

Nov 13 08:23 AM

[Bottom Up I...:]

I think AMZN is turning into the Wal-Mart of the Internet - its just a fantastic all-around company. That being said, I think its valuation is too rich to support buying right here. You shouldn't short something on valuation alone, so I'm staying on the sidelines, but a price war with walmart.com could very well be much anticipated (by bears, that is) negative catalyst. While AMZN is dependent on online sales, Wal-Mart's online site accounts for a miniscule portion of revenue. They can afford to kill online margins to steal market share from AMZN. I'm keeping my eye on this for a potential short-term short trade, but would most likely be buying on a decent-sized correction.

Nov 13 10:14 AM

[Harry Tuttle:]

There are no "investors" in these stocks. Just people chasing stories.

That is why people buy FNM common but the preferred which is senior. The preferred is not listed in the NYSE and doesn't have a story.

Nov 13 11:57 AM

[Patricia013:]

Every time I buy off Amazon I am amazed! They have done their homework well and it shows in their attitude, the wide range of items and the super fast delivery and service! Right now, they are unparalled. With top notch service Donahoe has failed to beat and bludgeon his sellers into providing! This coming holiday season will see Amazon crush ALL competition and sales will soar! Good hard work is NOT a bubble...it is what it is!

I agree that the author doesn't really know what he's talking about. I buy enough on Amazon to have a credit card on file with them...something I wouldn't do with any other site.

Nov 13 11:58 AM