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Massive Downside Trade Opportunity On Amazon

Jan. 23, 2014 2:34 PM ETAMZN, NFLX35 Comments
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Global Shipping & Trade, Income Opportunities, Deep Value, short ideas

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BS in Economics, MA in Public Policy (International Economics), pursuing Doctoral in Public Policy (Intl Relations). J is an established independent research provider and hedge fund consultant in the maritime shipping sector.

Mintzmyer founded Value Investor's Edge, a top-ranked deep value research service in May 2015, with the goal of establishing a top-tier community of deep value investors and activists. Value Investor's Edge subscribers leverage exclusive in-depth analytic reports and community investment experience to discover disconnects in global shipping and a variety of other beaten down sectors.

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Pursuing a Doctorate in Public Policy (Intl Relations) from Harvard University. M.A. in Public Policy, with focus on International Security & Economic Policy from the University of Maryland. Distinguished Graduate of the United States Air Force Academy with a B.S. in Economics. Extensive background in financial analysis, equity research, accounting, portfolio management, and customized asset allocation through nearly a decade of formalized education, personal studies, and practical experience. Avid reader of business/investments and biographies.

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This is an extremely speculative opportunity that I wanted to share with my followers, but it's not something I really 'recommend' from an investment perspective (prudent management of money). Either way I wanted to share my thoughts on the trade and potentially get some feedback on my thoughts prior to expiration. Since it's such a speculative position, I didn't want to submit this as an official 'article.'

After watching JCP, SHLD, BBY, M, GME, KSS, COH, TGT, BBBY, ARO-- virtually every retailer report disappointing results, I had two thoughts:

1) B&M (brick+mortar) is getting killed by online-- namely Amazon (AMZN)

2) Wow, the whole retail sector is getting crushed across the board.


After watching BBY boost online sales by 28% and still get crushed by over 30% the next day, I realized the market was on serious pins & needles with their 2012 top stocks. Hell, GME beat on revs and only slightly missed on EPS and they took a 22% beating also.

This led me to four subsequent observations and beliefs:

1) The stock market has a lot of underlying nerves/tension, especially with the top gainers from 2012: (BBY, NFLX, LNKD, FB, TSLA, GME all fell into this group-- 2/2 had reported mediocre results and 2/2 got massacred)

2) Perhaps the ENTIRE economy is weak. INTC is hurting, AAPL is slow growing, car sales are tepid, home figures are jumping around, interest rates are creeping back up, unemployment #s are bad (14% according to U-6, which is the REAL measure imo).

3) Amazon revenues are out of line with either a weakening economy or the quarterly trends they've established. Amazon is priced to not only steal massive shares of holiday shopping from B&M stores, but they are priced for a roaring consumer economy.

4) Amazon trades at a clear correlation to revenues (P/S). No other metric can value or describe their recent stock marketperformance.

Belief #1 was a major underpinning of my earnings trade on NFLX. My long-term thesis has been outlined in detail, but my earnings trade was based more on weak forward guidance. I also believed that NFLX had far more negative pressure than 'bull pressure.' NFLX beat expecation (slightly) and BLEW OUT forward guidance and they went up 15-16%. If they had missed, I firmly believe it would have been a -30 to -40% bloodbath. But anyways, my point on bringing up NFLX is that my belief #1 might be flawed. Perhaps not every 'huge flier' from 2013 is under immense market pressure. I suppose we won't know for sure until after AMZN, LNKD, FB, and TSLA have all reported.

Belief #2 is pretty self-explanatory, feel free to debate if you will, but I think the facts are pretty solid.

Belief #4 (coming back to 3 below) is also well established. Look at Amazon's revenues and stock price back 2-3 years. Pretty tight correlation. AMZN has no earnings, little free cash flow, marginal operating cash flow, no dividend, an iffy balance sheet, yeah... P/S is the only thing that sorta makes sense.


So? Is Amazon's growth expecation far out of line? Check this out:

This is a chart I made showing the past 4 years of sales growth and including the mid-point of revenue expectations-- $26.03B or 22.5% growth. Keep in mind this is the midpoint, range is $25.27B to $26.74B (18.8% to 25.7% when compared to $21.27B last year).

The chart looks okay right? You see the downtrend due to law of big #s, and a slight uptick in Q3. Note that Q4 is higher than Q4 the year before and Q1 and Q2 of the same year. That's a bit odd right? Expected growth acceleration at the tail-end?

Now check THIS chart out that shows the seasonality/cyclicality of growth:

Notice the massive gap that holds steady in the range of 6-9% (6, 9.33, 8% to be exact)? Then suddenly (poof!) it's gone. Something doesn't add up here folks.

Then I tried something else-- a fellow contributor told me about a strong Google Trend on the terms "Amazon Christmas" that showed a correlation to previous Q4 sales. That search term was up suggesting a strong growth in sales. However, I tried Google Trends for "Amazon.com" and "Amazon" and check this out!

Ok-- so you can see the growth in AMZN right? But check out the growth differential from 2012 to 2013 (13.7%) and this year (2.7%). Not looking good.

Now, this trends figure doesn't really tell us a lot as it really reflects more of a combination of both news interest and unsophisticated internet users. You'd be surprised how many people navigate to every site through google though-- and with Chrome or Firefox, it's easy to get into the (poor practice) habit.

The trends imo are a good measure for unsophisicated users... and/or AMZN's new clients. The old/hardcore clients such as myself have been using Amazon for 5+ years and have it as a click favorite. My mother has it as her homepage! There aren't a lot of people out there that don't know how to use Amazon.

That being said-- Amazon also depends on a ton of existing customers spending MORE. I don't have a proxy for that, but I believe that strongly correlates to the strength of the economy and retail in specific-- all signs show that both are medicre this season.


In conclusion:

--Seasonality and trends are projecting far slower growth, something in the range of 15-20%, but analysts are expecting 19-26%

--Google Trends data is extremely weak (in terms of growth)

--The economy itself and especially the retail and electronics/tech sectors are weak

--Amazon is trading at P/S multiples so meeting and/or beating expectations is EVERYTHING to this stock

The trade:

I asked a buddy of mine-- if you have a trade with a 30-40% potential of being a 20-bagger would you take it?

My trade is as follows: $370 Feb7 puts for approx. $4-$5 (I paid $4.20)

If I'm wrong, and AMZN beats, they will probably expire worthless.

If I'm close and AMZN ties, you have a good chance of breaking even (only takes a 6% drop the week after)

If I'm right and AMZN misses, you will have anywhere from a 10-bagger ($330--17.5% drop) to a 25-bagger ($270--32.5% drop).

This is the best trade opportunity (in terms of profit potential and related risk) that I've seen in my entire career.

I've seen several chances to gain 50% in a short amount of time with something like USU or OCZ puts (many of my followers made lots of money on both of these), and I've seen a few no brainer plays like long straddles on NFLX, but I've rarely seen something with a 30-40% chance of occuring and a 10-25x payout.


As I said, this is super speculative and scary, so I didn't want to put into an article. I'm long 4 contracts- if my NFLX trade (otm puts) had panned out, I was considering as many as 10-15 contracts.

DISCLAIMER: I'm just sharing my opinion here. This is really risky stuff and frankly kinda stupid. I am NOT a registered investment adviser, I am just a personal stock blogger who likes to share his opinions on possible actions.

Disclosure: I am short AMZN, NFLX.

Additional disclosure: I am short AMZN via $370 puts that expire on February 7, I may add more or roll the strike at any time. I am short NFLX via $290 puts that expire Jan24, $300 puts that expire Jan31, and $170 puts that expire Jan 2015.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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