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%.
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.
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.
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.