Blue Nile's Soaring Stock Is Opportunity To Sell

Brian Bolan, research analyst at Jackson Securities, sent a note to clients reiterating his Sell rating on Blue Nile (NILE) following their 2Q07 earnings.

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Company Description

Blue Nile is a leading online retailer of high quality diamonds and fine jewelry. Blue Nile specializes in the customization of diamond jewelry with a “Build Your Own” feature that offers customers the ability to customize diamond rings, pendants and earrings. While not providing the lowest cost diamonds, the company believes its formula of no pressure sales, high quality educational material and reasonable prices will result in higher profits.

Valuation and Recommendation

Blue Nile has performed admirably over the past few months and the stock continues to soar as if to make Icarus envious. We certainly have missed the boat on this stock, but we continue to believe that the stock will eventually trade on its fundamentals which suggest a lower per share price.

Earnings Release for 2Q07

Blue Nile announced revenue of $72.1M for the second quarter of 2007. This represents an increase of 26% from the same period a year ago, and well above our estimate and that of Wall Street. The company posted earnings of $0.23 per share beating our estimate of $0.17 and Wall Street consensus of $0.17 per share. This quarter was a strong one indeed, but the fact remains that then CFO Diane Irvine talked Wall Street off of lofty expectations for the quarter during the first quarters conference call. Having not been invited to participate on the conference call or any follow up session, we have decided that we no longer be listening to guidance that tells us to lower our estimates then beats them handily.

Orders and ASPs

The average sales price [ASP] was $1,630, down 0.4% from a year ago, and up 8% from the prior quarter. Orders were up 27% from a year ago, well ahead of our expectations of approximately 40,300. We have modeled in assumptions for next quarter of an ASP of $1900 and total orders just over of 38,000. Those assumptions give us a topline number that is well above guidance.

Our view on the stock

We have certainly missed the boat on this one, and we believe the stock has performed as well as it has for a few reasons. Certainly the small number of shares outstanding creates a tight float and the potential for frequent short squeezes. The solid operational performance continues to support the overall trend the stock is exhibiting, but we believe that investors need to be disciplined when it comes to companies like Blue Nile. The valuation is stretched and we believe investors should sell shares. Our target price has been adjust to $70, which is still a rich multiple of 61x this years earnings.

Blue Nile Earnings Model