Amazon: A Short-Term Short

Sep.26.12 | About:, Inc. (AMZN)

Amazon (NASDAQ:AMZN), the well known giant online retailer, needs little introduction. It was founded in 1994, and boasts revenues of 55 billion (2012) and revenue estimates of 80 billion (2013). It's 2012 EPS estimate is 0.71 and 2013 EPS estimate is 2.33. Numerous SA articles have made the long term short case for AMZN (among them, Phil Davis). More recently, Paulo Santos discussed perhaps lesser known headwinds facing AMZN stock.

AMZN trades at an astonishing 352x 2012 EPS and 107x 2013 EPS. Current market capitalization is 110 billion. The operating margin is 1.17% and the profit margin is 0.69%. Wal-Mart stores (NYSE:WMT), the giant brick-and-mortar retailer has a profit margin of 3.53% and reached this with it's legendary operating efficiency. WMT has a 250 billion market cap on revenues of 460 billion and current year EPS of $4.92.

Let's assume AMZN matches WMT's revenues at 460 billion, and they manage to double their profit margin. At a 1.38% profit margin on 460 billion in sales, without ANY stock price growth, they would be trading at a healthy 20x multiple. This projection captures the problem with AMZN stock: too much growth is already priced in. You have to put together VERY optimistic assumptions to continue to hold the stock long term at these levels (if you think they can match WMT revenues at 460 billion, and more than triple their profit margin, the stock begins to look attractive).

Yet, the AMZN balloon keeps levitating. Why should we short it now? Well, this is something of a momentum trade. AMZN is below it's 5 day moving average. This gives us a short term down trend and a clear exit strategy. We want to buy short term put options (at the money) and hold until AMZN closes above it's 5 DMA. Be very careful with your position sizing on this trade - this is not something you want to bet the farm on. I would use a maximum 5% of account value; this way if the position moves against us by 20% you "risk" at most 1% of your total account. If AMZN falls, the value of the position will grow in size very quickly.

AMZN stock price: $249.81 / share.

Thesis: AMZN is overpriced and in a short term downtrend.

Trade: Buy November 2012 $250 Put options for $13.10

Management: AMZN is below its 5 DMA. Recommend closing the trade if AMZN breaks above and closes above it's 5 DMA. In fact, I would hold until it breaks above its 5 DMA. If this stock continues to fall in the next couple weeks, you want to let your profits accumulate.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am actively looking to start a short position in AMZN through ATM puts.