Amazon, the Perfect Short?

Amazon (AMZN) is a perfect short. The analysts have fallen in love with it and have ratcheted up earnings estimates to unrealistic levels. It's a bit reminiscent of Henry Blodgett's "pie in the sky" price targets prior to the 2001 Nasdaq meltdown.

Analysts are expecting AMZN to earn $1.54 on revenues of $19.3 billion in 2008 while pegging them to see earnings growth of 38% to $2.21 on a top line of $23.9 billion in 2009. These lofty expectations result in a forward 2008 PE of 48, which is staggering versus Ebay's (EBAY) forward PE of 19 and Google's (GOOG) forward PE of 24.

High expectations are dangerous for stocks; the market is fickle and it can turn on a stock in a heartbeat. Any disappointment that AMZN might report could send the shares in a freefall mode, as fear tends to drop a stock at a much faster rate than elation tends to rally it.

Some other food for thought: There is a substantial supply overhang of shares that could potentially be offered to the market; of the two largest shareholders, the CEO, Jeff Bezos, owns 99 million shares (about 25%) and Legg Mason owns 50 million shares. If either of these entities start to unload, the added supply of shares hitting the market could cause further damage. Legg Mason has already sold nearly 1/3 of its holdings since last fall (from 75.5 million to 50 million) and Bezos has dumped nearly 2 million shares. AMZN insiders have also been on a selling spree as they have sold 2.4 million shares within the last 6 months.

Bulls like to argue that AMZN's heavy short position of 34 million shares offers the potential for strong potential rally through a short squeeze scenario, but the short position has actually dropped from the previous month's total of 36 million shares and the short ratio is a meager 3.3, meaning it would take just 3.3 days of average daily volume for all the short shares to be covered (purchased).

Other compelling issues that clue the potential short seller that AMZN's valuation is too rich are a book value of only $2.87 per share and substantial long term debt of $1.3 billion.

Is AMZN the perfect short? If logic is your game, this one fits you to a tee.

Disclosure: The author is short AMZN.

Comments

[Stephen Fra...:]

i don't disagree, and I was short AMZN for a while. however, it was a much better candidate at $100... its a more reasonable value now.

2008 Apr 10 07:47 PM

[rukidding:]

"its a more reasonable value" ... On what valuation metric? It's a bloated stock facing some serious, Katrina-like, headwinds in its path. No one wants to touch this with a 10 ft. pole, just look at the anemic daily volume, the only thing holding this thing up is the fact that it is tightly held by Legg and Bezos; when they decide or, worst yet, are forced to sell, look out below. reasonable value approx. $40

2008 Apr 10 08:54 PM

[Chandler Lutz:]

Great article! I have to say that I agree with pretty much everything you say...Amazon has a great brand, but their valuation is in the upper stratosphere especially as the US economy is facing slowing consumer spending and rising fuel and commodity costs. That said, I am reluctant to short Amazon's shares since I can't identify a catalyst that will drive shares down. Really, the only ones that I see you mention (and please correct me if I'm wrong) are the selling of shares by Legg Mason or the CEO. Although both of these are possible, identifying the probability of such events or when they will occur is nearly impossible....and of course to quote Keynes "The market can stay irrational longer than you can stay solvent."

2008 Apr 10 09:06 PM

[Unbeliever:]

I have had reasonable success shorting Amazon but ALWAYS failed over earnings. Whenever I was short, even if earnings were a meager increase, the price catapulted up and I got squeezed. Logic doesn't play well with this stock. I'll never own it over earnings again.

2008 Apr 10 10:05 PM

[Al Rob:]

You are the latest in a long line of people recomending shorting AMZN. Be careful, this is a dangerous stock for shorts.

2008 Apr 10 10:22 PM

[G.R.:]

your 100% right with this post. but the reason it isnt $40 already is there are no bids on this stock and the specialists know it, its just them rigging things as usual with the dumb SEC as useless as during the dot com era. if i was legg or bezos id be out already because this price is absurd. theres no reason this should be over $40, especially in recession.

2008 Apr 10 10:34 PM

[bb99:]

Add to these the facts that Amazon's tax free shopping is coming to an end with New York's budget passed yesterday that forces Amazon to collect sales tax for all purchases. Retail Associations have already stated that they will take this to every state. Amazon has also lost market share in the music market, going from 6.7% to 6% in one year (with Apple vaulting to #1, Wal Mart #2, Best Buy #3 and Amazon and Target tied at #4). Add UPS stating that domestic shipments have slowed dramatically with a company that is supposed to increase sales by 35% this quarter in an environment that is the worst for discretionary spending (50% of the revenues are books, CDs and DVDs). Cloud computing has IBM,Google, Yahoo, Microsoft and Emc as competitors. Amazon's Online music has everybody getting into a low margin business. The Kindle isn't even worth talking about as a blip on the revenue meter. I think I will stop for now because it will take too many pages to list the obvious facts here.

2008 Apr 10 11:09 PM

[steveballmer:]

I couldn't agree more!

2008 Apr 11 12:27 AM

[jimmy46:]

I tried shorting amaz in jan, broker said there were no shares available.
when did you get your position?

2008 Apr 11 01:13 AM

[fxtrader07:]

looking for a catalyst to drive amzn down? apart from the - very serious - tax issue look no further than the dollar! windfall gains from overseas sales, especially in europe, have added substantially to the bottom line and to margins. this woll change over the coming quarters. i do not expect a a real comeback of the dollar, but over the next 6-12 months it will ilkely stabilize and the euro looks very toppy here and may well be 10% lower a year from now. this together with a prolonged us-recession (that only few people talk about yet) and a marked global slowdown will eat into margins. top-line will be grwoing, no doubt, but bottom line will not nearly as much as is required to even remotely justify a 50 forward p/e. btw, over its entire life as a public company, amzn has not yet really earned a dime! retained earnings are a whopping 1.4 bn NEGATIVE - i.e. 1.4 bn accumulated losses! Long WMt, short AMZn is a no-brainer trade for the next 2-3 years!. I would probably wait to implement it (or at least implement ownly half of it) till earnings come out for amzn in a few days. i expect, the weak dollar will give them another final push before things start getting really ugly for amzn

2008 Apr 11 04:15 AM

[bb99:]

The most obvious fact here is that while analysts have said incredible things such as Amazon being "as close to it gets for recession-proof", this company is the poster child for discretionary spending. Retail sales for Germany and UK have dropped as well as today's huge drop in US consumer sentiment (as well as all of its peers reporting lower sales). As I stated, along with new taxes starting on the online retailers for cash-starved states, books, CDs and DVDs are not consumer staples! That is why Wal Mart and Costco are trading better for their ever-increasing selection of consumer staples (they trade for 1/4 of the 2008 P/E multiple of Amazon).

2008 Apr 11 10:54 AM

[robert99:]

Ha! People here are looking for a catalyst? How about the fact that consumer sentiment is at 25 year lows, or that we are probably going to be entering in a recession before the year is out!?!? I shorted AMZN on the way up, regrettably, and lost a little bit of money on three separate occasions. HOwever, the irrational exuberance surrounding AMZN will dry up along with consumer spending, and I am fairly confident that AMZN's market cap will drop by 50% before 2008 is up. If I did not have a personal rule that I never revisit a losing stock, I would short it myself. Personally, I think shorting the overall market is the best bet right now, but you could certainly do worse than an AMZN short.

2008 Apr 11 01:17 PM