The Short Thesis

Dec. 2.11 | About:, Inc. (AMZN)

There’s a compendium of strong reasons to be short (NASDAQ:AMZN) from the present ($196.80) levels. This article summarizes them:


It’s like is trading in another planet. In a market where every large-cap stock seems to be cheap with the S&P (NYSEARCA:SPY) trading at 13 times 2011’s earnings and large-cap tech trading even lower, trades at 161 times 2011 estimated earnings and 95 times 2012’s (with a high likelihood of 2012 being revised further lower).

Valuation by itself is rarely a good reason to be short, however, the bear case for is about much more than just valuation – valuation here just makes the downside much larger.

Falling margins

Since 2004 has seen lower and lower operating margins, down to a point where it might actually start seeing losses. The margins have fallen so fast that even’s rapidly increasing sales volume couldn’t keep up with them.

Falling earnings

Since the revenue didn’t increase faster than the margins fell,’s earnings are actually falling and falling fast. Amazon’s 2011 earnings are expected to be lower, per share, than they were back in 2004! And they’re expected to fall 52% from 2010, with an even faster fall in the last two quarters of the year (earnings are falling at a rate of around 70% now).

Obviously, having rapidly falling earnings is exacerbated by the fact that traded at a high multiple to earnings even before these fell.

Falling estimates

The earnings didn’t just fall, the estimates fell as well, and they didn’t just fall for this year, they fell for the coming years as well. For instance, 2011 is now projected to come in at $2.05, with these estimates having fallen 42% just in the last 90 days.

Falling estimates is also important because of the way stocks with falling estimates usually underperfom and have a higher likelihood of missing even the lowered estimates. And of course, trading at high multiples to falling estimates compounds the problem, making the potential downside larger.

Sales tax collection

One of the biggest advantages enjoys today is not having to collect sales tax where most of its competitors, both online and offline, have to collect it (this happens to online competitors as well, because the main online competitors, like (NYSE:WMT), also have a physical presence). This advantage is slated to go away during 2012, either through Congressional initiatives, or through state-by-state attrition (with already having agreed to start collecting sales tax in the most important state for them, California, from September 2012).

Evolving marketplace

Web buying of digital products is moving from the browser to apps, and Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) control the operating systems where those apps and markets usually come pre-installed. This trend is highly unfavorable to’s position and might have prompted’s razor and blades strategy with the Kindle fire. However, Amazon does not really control de razor, does not own or control the blades, and the Kindle fire has little chance of making a difference even if it sells tens of millions of units, because the market controlled by Apple and Google through iOS and Android already numbers in the hundreds of millions of devices.

No real cost advantage

Although the thesis that online retailers have a cost advantage in not having a physical retail presence is widespread, a careful analysis of Amazon’s operating costs / revenue reveals that Amazon’s cost structure is comparable to Best Buy’s (NYSE:BBY) [21.49% of revenue for Amazon, 22.71% for Best Buy] and actually less efficient than Wal-Mart’s (19.50%). This mostly happens because the customers don’t really consider their costs to drive up to a big box retailer and do their shopping, but they DO consider the shipping costs when buying from an online retailer – so the online retailer mostly has to eat those costs, which presently can be as high as 10% of revenue at Amazon.

Conclusion is a clear short opportunity, and these short opportunities are even more valuable today, in an undervalued market, because they present a way to hedge long positions.

Disclosure: I am short AMZN.