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Amazon (AMZN) has launched a new promotion for December 10, 2011 that gives customers 5% off (up to $5.00) on up to three qualifying items. The discounts are available only if the customer checks the price of the goods on the Price Check app while at a physical store carrying the goods.

The promotion is controversial. Some have called the Price Check app and promotion brilliant. The promotion turns customers into unpaid spies for Amazon. Without spending a dime, Amazon gets price comparison data from a large number of stores.

It is the age old technique of giving people an incentive to use a new product, the Price Check app in this case. As people get used to the Price Check app, it is near certainty that Amazon will draw more volume. Amazon may also see a miniscule reduction in its expenses as it spends less money on gathering price comparison data.

On the negative side, this promotion has raised furry among politicians, advocacy groups, as well as brick and mortar retailers. This ire seems to be gathering momentum as I write this article. #occupyamazon on Twitter is seeing lots of activity. There is also a Facebook page called Occupy Amazon.

Amazon has become a very large company with a market cap of $87.78 billion. The stock is expensive at trailing P/E of 101. Normally such high multiples are justified based on high growth rates. Amazon is growing fast but P/E to Growth (PEG) ratio of 7.34 based on consensus expected growth over five years does not justify the high P/E.

Bulls on Amazon echo what Amazon said on its last earnings conference call – Amazon is investing in the future. Bulls ignore that Amazon will always need to continue to invest in the future. The nature of Amazon’s business is such that high growth will invariably come from ignoring gross margins.

What is the proper valuation of Amazon? A quick look at the financial statements shows an average operating margin of about 2.5% and return on assets of about 4%. These numbers are not likely to improve a lot over the coming years.

In spite of all the publicity surrounding the Price Check app, there is not likely to be any meaningful immediate financial impact. In the long-term, if this app catches on, it will help Amazon against competition like Google (GOOG) and eBay (EBAY).

Among brick and mortar retailers, Best Buy (BBY), Conns (CONN), H.H. Gregg (HGG), and Sears Holding (SHLD) may see meaningful negative impact. These names represent short selling opportunities. Other retailers including Wal-Mart (WMT), Target (TGT), Macy’s (M), J.C. Penny (JCP), Cost Co. (COST), Dillard’s (DDS), Staples (SPLS), Office Depot (ODP), Office Max (OMX), and Pet Smart (PETM) are not likely to see much impact.

At the present price, from a fundamental point of view Amazon is a short, but technicals do not support a short sell. My 30 years of experience with the markets has shown that it is best to initiate a short sale only when a trigger likely to change the sentiment is anticipated in the near future. It is best to use a proven method to time a trade entry. One of the six screens on my ZYX Change Method is the trigger screen. The trigger for short selling Amazon is most likely to be deceleration in revenue growth unless the prevailing market wisdom changes. The prevailing market wisdom about Amazon is that profits and margins do not matter.

Source: Investment Implications Of Amazon's Price Check App