Mark Krieger's  Instablog

Investors have a short memory. They tend to follow the herd into the flavor of the month club and AMZN proves to be no exception. Some could argue its valuation is approaching bubble status when calculated at 52 times 2010 earnings estimates of $2.53 and 16 times book value. Looking at this deeper, the $2.53 earnings figure, which represents impressive growth of 35% could be too low-if they earn $3.00 for a 60% improvement, the forward multiple falls to a more reasonable 40 times earnings, after all, stock’s with higher growth are rewarded with higher multiples. This is a compelling argument  to  why Wall Street is hanging its hat on the premise AMZN’s current estimates are indeed too low.

 

 Potential dangers: The market seems to be putting its head in the sand regarding potential AMZN landmines. The threat of an   impending internet sales tax, Walmart’s  pledge to start an all out price war and the slew of competitors getting into the EBook reader business has  swayed most analysts not to show caution. Everybody seems to be bullish on this one,  and when market sentiment is this one-sided, tops are usually imminent.

 

Short position abating: AMZN’s short interest dropped 10% to 17 million shares ( about 3.9% of outstanding shares) in the last period, so there will be less short fuel available to keep the upside momentum intact. I would think these very  overbought shares could be susceptible to a correction through profit taking and fall as much as 10% before buying support reemerges. The fact is the stock has gone up too far in too short of a time frame and needs to at the very least, pause to refresh.

 

Analyst take: Since October, all four analyst actions have been positive ,yet AMZN’s share price is still  4%  higher  than the analysts one year median  price target of $125. This  fact alone, should set off some warning bells  to stay clear of this one. Who knows when the music will stop and everyone tries to hit the exit doors at the same time. The risk certainly outweighs the reward at this price level.

 

My take: I admit my track record on this one has been horrendous, but every dog has his day and eventually AMZN will disappoint,  and when it does, the shares will literally implode. That is the time when you want to be short. Easier said than done.