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J Mintzmyer is a CFA candidate (testing Level 2) and investment enthusiast who utilizes Seeking Alpha to provide a free exchange of trading and investment ideas and to provide online visibility for his developing business. Founder and President of Mintzmyer Investments LLC, a financial services... More
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  • Amazon ‘Kid-Gloves' Insanity Continues  19 comments
    Jan 30, 2014 5:14 PM | about stocks: AMZN, FB, GOOG, EBAY, AAPL

    I'm posting this at around 5pm, prior to the Amazon (NASDAQ:AMZN) conference call, but after witnessing the Q4-13 results and the subsequent market reaction. This reflects my initial results after reading the results and watching the market impact.

    I'm choosing an instablog post so that I can more freely express my feelings. Keep in mind I have puts, slightly itm, so I have a vested interest in this company.

    Although initially only suffering a muted impact, Amazon is currently down almost 8%. However, this needs to be taken in problem context-via 2 metrics:

    First- AMZN was up 4.9% on an insanely undeserved tech bounce brought about by Facebook (NASDAQ:FB). Taking this away makes Amazon's true hit closer to only -3%. Remember that Apple (NASDAQ:AAPL), arguable the hottest tech company and ironically also the biggest large value play in the world missed by far less than Amazon (and beat EPS markedly!) and got hit for a 9-10%.

    Secondly- AMZN was at $363 after Q3-13 results, so the current market pricing has actually made a 0% impact to Amazon since their last publicly available report.

    Amazon's Multiples are Unexplainable- even P/S

    As I've mentioned before in previous coverage, Amazon is valued almost entirely on sales. Profits are practically non-existent. Amazon lost money in 2012 and earned a total of 59c in 2013. That's a Price-to-earnings of 683 based on the pre-earnings price of $403. If you ask anyone on Wall Street they will say "yes, AMZN is valued on SALES, not profits," but what they fail to realize is the sales multiples are also insane.

    The only logical way to value Amazon is by sales. Fair enough. Amazon is an online retailer with side offerings of technology. Amazon is best of breed in customer service, but its profit margins are lacking. However, just for grins let's compare AMZN against the P/S ratios of what I believe to be the top 4 retailers and the top 4 technology companies. Ebay (NASDAQ:EBAY) is also a 'decent' comparable, so we'll bring them in as well (P/S of 4.21, with a P/E of 24-if we're going direct 1-1 comps you cannot ignore earnings). If you have disagreements on my comps, feel free to substitute your own in, and let me know what you find.

    First, all of the above 8 comps have fantastic profit margins and earnings growth rates. Amazon's comparable 5 and 10 year earnings growth rates are abysmal. Amazon hardly has the benefit of a 'profit margin.' Anyone who thinks the above comps are 'unfair' to Amazon is operating on an entirely different playing field, albeit not too far off the broad market's "field."

    The more important question is: "What true mix is Amazon?" I believe that in the most optimistic scenario AMZN is 75% retail and 25% tech. I believe the 'fair' split is close to 90/10.

    What valuations do the 'best' and 'fair' bring? 1.39 P/S and 0.88 P/S respectively.

    AMZN has TTM sales of $74.45B and mid-level forward estimates of $91.64B. First of all-the mid-level forward estimates are insane. Amazon will be lucky to achieve 18% y/y growth, let alone 23.1%, but for the sake of optimism, let's assume they both make the sales guidance and deserve the forward P/S.

    That brings a 'fair' to 'best' value for AMZN of $80.6B to $127.4B, or roughly $172 to $271.

    Assuming the mid-point, that's over 40% down from where they are currently trading. Currently AMZN is trading assuming tech/retail split of 40/60% (1.89 forward P/S). That's assuming both the forward growth is met AND the forward P/S is applied over a TTM P/S.

    Amazon Had No Excuse to Miss

    Amazon had virtually every tailwind imaginable. GDP is picking up, unemployment is down, B&M retailers suffered, record online visits, record package deliveries, extreme winter weather effect, new Kindle launches, new console launch season for gamers, Prime video upgrades, AWS expansion.

    I probably missed a few tailwinds, but the fact is AMZN had it extremely easy this winter. On company reputation and popularity alone combined with the above elements, a ham sandwich could have given Amazon 15%+ y/y sales.

    Q1 Forecast is Atrocious

    As we all know, forward guidance is everything. Amazon has guided for a 13-24% y/y gain in sales. 24% gain is hot. 13% gain is an unmitigated disaster. AMZN is clearly hoping analysts pick a high mid-point here, instead of the more likely range of 14-18%.

    What Thesis?

    The way I see it, Amazon has just received a free pass on the only metric that matters (apparently). Amazon is once again guiding for an earnings free quarter (-$200M to +$200M in profit for Q1-14), and attempting to pump every possible 'social media' and 'web payments' coattail they can.

    Trade Actions?

    I cannot in good faith recommend anything on Amazon (AMZN). This is perhaps the most broken stock I've ever witnessed on Wall Street. Sure Netflix (NASDAQ:NFLX) and Facebook (FB) have huge multiples, but they also represent amazing new technologies. Google (NASDAQ:GOOG) is on a run, but their earnings and revenues are skyrocketing. Amazon has been receiving a free pass for over a decade, and the sales growth thesis finally is collapsing, but the market still ignores it.

    Clearly I do not understand this company. Best of luck to everyone involved.

    Disclaimer

    The entire above contribution is opinion only and does not constitute any level of 'investment advice.' This material is disseminated for entertainment purposes only.

    Disclosure: I am short AMZN.

    Additional disclosure: I am short AMZN via $370 puts for 7Feb14. I am long MSFT, TGT, AAPL.

    Themes: Short Ideas, Earnings Stocks: AMZN, FB, GOOG, EBAY, AAPL
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Comments (19)
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  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » Please keep in mind I wrote this as fast as I could to get immediate thoughts out- I'm clearly emotional at this stage, which is NEVER good for a trader or investor. I usually refrain from AH actions and there's obviously a reason the market allows earnings to settle in a bit before full market trading!

     

    I have a strong track record of owning up to mistakes and I made a huge one with Netflix. I believe the market's reaction to Amazon's miss is completely irrational; however, we'll see what happens.

     

    I'm glad to have Feb 7 puts. I plan to hold until expiry unless we surpass $320, but this is rough target right now.

     

    Best of luck to everyone involved.
    30 Jan 2014, 05:17 PM Reply Like
  • Christopher Wallace
    , contributor
    Comments (1141) | Send Message
     
    I think you have summarized the situation well, not showing any excess of emotion that I can see. Congrats on your put position! I would be very interested to learn about their fulfillment costs in the most recent Q; I think that ultimately becomes the Achilles Heel in the AMZN biz model.

     

    BTW, your comment "The only logical way to value Amazon is by sales", is one I would have a minor quibble with. While it certainly is how investors today are valuing AMZN, someday that will change and real "value" metrics will become applicable here, too.
    30 Jan 2014, 05:28 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » I should have said "the only logical way to EXPLAIN Amazon's current valuation is through sales multiples."

     

    Thanks for the comment Christopher.
    30 Jan 2014, 05:39 PM Reply Like
  • Jaka11
    , contributor
    Comments (30) | Send Message
     
    If this isn't a fraud, nothing is.
    30 Jan 2014, 05:28 PM Reply Like
  • Slim Shady
    , contributor
    Comments (424) | Send Message
     
    Does anyone else find it disingenuous that they would highlight that without changes in foreign exchange rate net sales growth would be 22% instead of 20% reported, yet they have never broken out the impact of the change in accounting for 3rd party sales?
    30 Jan 2014, 05:39 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » It's beyond insane, but the 3P sales change is gone next year. Notice the 13-24% forward guidance for Q1-14.

     

    Why is NOBODY picking up on the 13%- that's pathetic.
    30 Jan 2014, 05:45 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » As of 5:40, AMZN is in the GREEN for the day.

     

    Insanity. I give up. This may be the last earnings trade I make for many many moons.
    30 Jan 2014, 05:40 PM Reply Like
  • DBrooks22
    , contributor
    Comments (26) | Send Message
     
    Anything can happen tomorrow and next week. We might see an avalanche of selling.
    30 Jan 2014, 05:42 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » I'm holding to expiry. I have a prayer that either market rationality prevails or the overall market resumes the bear trend. $FB really threw a wrench in my trade.

     

    The analysts are asking some crazy questions on the line. I think they forget AMZN is 80-90% a retailer...
    30 Jan 2014, 05:46 PM Reply Like
  • DBrooks22
    , contributor
    Comments (26) | Send Message
     
    I think once the call is over, there will be a renewed focus on the terrible guidance.
    30 Jan 2014, 05:47 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » Listen to the call if you would like- Seeking Alpha has it, just ended 2 minutes ago.

     

    CFO (I believe) needs a speaking coach.
    30 Jan 2014, 05:51 PM Reply Like
  • DBrooks22
    , contributor
    Comments (26) | Send Message
     
    The post-call selling has started. Expect it to continue...
    30 Jan 2014, 05:53 PM Reply Like
  • Thomas S Hunter
    , contributor
    Comments (15) | Send Message
     
    I think an old saying comes to mind:

     

    "The market can remain irrational longer than you can remain solvent"

     

    Good work on the call. You got the thesis correct. If only you had $billions of AUM and could get a booking on CNBC to tell the world how this doesn't make any sense.
    30 Jan 2014, 08:33 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » Thanks Tom. We'll see-- Q1 is looking pretty miserable on their projections. If they say "13 to 24%" and average analysts thought 23%+ then that's a pretty major miss.

     

    Looks like analysts also expect a 23% y/y growth for 2014, I'm not sure where they think this money is going to come from. BBY grew online sales 28% and WMT grew up to 50% y/y while EBAY is turning up the 3P heat.

     

    Low hanging fruit is gone, AWS growth is nice, but negligible profits.

     

    I'll probably stay out of the trading biz for a while (several months) if I don't turn a profit on these puts.
    30 Jan 2014, 08:38 PM Reply Like
  • JKenser
    , contributor
    Comments (472) | Send Message
     
    J. Mintz, dont get too down on yourself. You were right in your approach, sometimes the market just goes against us. The beauty of trading is that its a forever learning experience. Yes there are times when money comes easy but for the most part its very hard work. Just don't give up, you'll come back. Good luck to ya..
    30 Jan 2014, 08:48 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » Thanks kenser, but if I can't make money on my short-term calls, why waste the time doing it.

     

    Better off just warning people NOT to invest in a product, but not short it.

     

    I'm working on building a 5-10 year track record, and while my long-term allocations have done very well, my average in trading is mediocre-- underperformed in both 2012 and 2013. I destroyed the market in 2011, but that's because it was a down year. I've discovered that I am a semi-permabear (trading wise-- almost all puts) and hence I only do well on my calls when the markets are poor.

     

    I've made some great call plays, but all of them have been long term-- ex. $10 Bac Jan14 calls (fall 2011) $18 HPQ Jan14 calls (Nov 12). Never made a short-term call play, as I'm always catching myself pessimistic into earnings. Even most of my long term plays have been puts.

     

    As I said, it worked in 2011, so-so in 2012, and bad in 2013. Thankfully I have about 5-6x the money in long-term stuff so 2013 was still good for me.

     

    Reading all of the metrics on the underlying market (P/E, margin levels, IPO issuance) combined with tapering brought me into 2014 extremely bearish. With NFLX, FB, and now AMZN, it looks like we might have another 6-12 months of partying, and I'll be better off on the sidelines.

     

    Long comment, but trying to get to the psychological root here.
    30 Jan 2014, 09:06 PM Reply Like
  • JKenser
    , contributor
    Comments (472) | Send Message
     
    Experience is everything in the markets. Every year you trade is a year closer to consistent profits. No one starts off trading and instantly starts making money. Trading is very emotionally driven, so it's better to figure out a trading strategy that suits you before you start. The problem is that most people are either drawn to the bear side or bull side. It takes time to figure out how to balance that. If you're more bearish, try to figure out a trading pattern that favors bears. For example, there are trades everyday that can be played on the downside. Find a stock that has raced up huge in a short amount of time and wait for it to break then short it. This takes serious discipline, a day trading account, and a good amount of technical knowledge but the risk can be very low and the profits can be very consistent if you play it right. It's really all about finding out what kind of trading you're most comfortable with.
    30 Jan 2014, 11:03 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » I went long (8) $385 calls this morning for around $2.75. I wanted to 'hedge' my position against the inevitable afternoon barrage of upgrades.

     

    I sold half my position (2) of $370 puts approx. 5 minutes ago for $8.75, broad market is picking up and leaving $AMZN behind, I think AMZN will track in a few minutes off the consumer confidence data.

     

    While I'm not impressed with the data, and I think AMZN is a joke, it doesn't really matter what I think. Big boys don't care.

     

    Anyone still holding these puts I'd suggest selling between 50-100% of your position and taking your 100%+ profits. Don't get greedy fellas.

     

    If the market recovers next week and/or AMZN gets upgrades, we could see $400-$410 next week easily.
    31 Jan 2014, 11:17 AM Reply Like
  • J Mintzmyer
    , contributor
    Comments (3846) | Send Message
     
    Author’s reply » Just to give everyone a fair trade update, I sold the last 2 of my puts ($370s) at $12.90 and rolled into 4 puts ($350s) for $3.10.

     

    This allowed me to take 1/2 the money off the table, with a breakeven point at $330 and 2x profits from $330 on down. Personally, I think if you are up 3x on these puts it's probably smarter to just take your profits and walk out with a giant grin on your face-- but I'm being greedy here.

     

    My net position for next week is (7) $385 calls (3) $380 calls and (4) $350 puts. I'll make money in total from $349 or lower or $385.50 and higher. If AMZN ends next week in that range (and I don't close one of the positions-- unlikely) then I lose around $300 in total.

     

    Obviously I stand to make a very good deal on either the upside or the downside.

     

    For anyone who followed the gamble here, please don't get greedy. I'm glad this position worked out for us.

     

    Have a wonderful weekend everyone!!
    31 Jan 2014, 03:53 PM Reply Like
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