Amazon (AMZN) delivered nice results, but let’s face it, they were not fantastic enough to justify propelling the share price 20%. I admit, I got my head handed to me on a plate, as my 800-share short position caused some serious hurt. I guess I drank too much of Broadpoint Capital’s Analyst Tim Boyd’s bearish Kool-Aid, but as a consequence of the violent run up, I think the shares have become even more overvalued.
I am stubborn and will hang on to my short position until profit taking hits, and knocks the stock down to more realistic levels. The stock ran up more in one day than the company is expected to earn in the next five years combined. Its insane multiple of 40 times 2009 estimates of $1.48 borders on calamity. I realize that AMZN deserves a higher multiple, since it is one of very few stocks still generating earning growth, but more in the range of 20-30% higher, not 100% or 200% loftier than such names as RIMM, AAPL, MSFT, EBAY , CSCO and INTC, averaging about a 15 PE multiple.
Fourth quarter was good, but not that good; when the company issued fourth quarter guidance back in October, it comprised a large range. Sales guidance was $6 billion to $7 billion, while its operating earnings forecast was $145-$305 million. Well, AMZN didn’t even end up surpassing the top end of its revenue guidance when it posted sales of $6.7 billion (they came in the top 30% of the range). AMZN also came in within the top 30% of its earnings range, prompting the question: What is all the fuss about? I just don’t see how the market construed this as a beat? Am I missing something? Could it be excitement about Kindle sales? Bezos made it clear the Kindle reader was attracting strong demand, but refused to provide details. Is this a “pump and dump” scheme?
First quarter guidance was sketchy: AMZN is supposed to be a “growth stock”, yet its low end guidance for its first quarter indicates a falling off as much as 37%. AMZN’s operating income guidance is so wide, you could sail an aircraft carrier through it, comprising a range of $125 million to $210 million. The top of the range is 85% higher than the bottom. When it comes to its revenue guidance range, it is much tighter. The spread of $4.52 billion to $4.92 billion, represents the top end, at only 10% above its starting range. Growth stocks are not supposed to see earnings declines, and AMZN will make sure “at all costs” it avoids this calamity. My best guess is, they will repeat their 4th quarter scenario by coming in within the top 30% of guidance ranges in both sales and earnings, delivering sales of $4.8 billion and earnings of $185 million.
Gross Margin issue: If you compare gross profit margin on a year to year basis (4th Q 2008 versus 4th Q 2007) its decrease does not seem that alarming - dropping only 50 basis points from 20.6% to 20.1%. The decrease represents only a 2.5% reduction. However, if you compare AMZN’s gross profit margin sequentially, the picture begins to look bleaker. The fact is, AMZN produced a 23.4% gross profit margin in its third quarter. In just one quarter, AMZN incurred a 350 basis point loss to its gross margin, signifying a 14% overall deterioration. That is significant when you consider new services with very high margins, such as music and video downloads, seem unable to slow the margin erosion. Remember, AMZN is a retailer, and gross profit margin to a retailer is like fish is to a fisherman, "sacred."
Bottom line: The shares have simply gone up too far in too short of a time frame and are due for a nice dose of profit taking, as longs begin to ring the cash register. The stock also received some nice upward momentum due to massive short covering, but this covering will soon begin to abate. When reality finally starts to set in and the “giddiness” over the quarter evaporates, the stock will sink to a more appropriate multiple. Hopefully longs will have the sense not to get too greedy and use this recent strength as a selling opportunity, before their gains turn quickly into losses. Don’t get me wrong, I think AMZN is an extremely well managed company, with tremendous prospects. It is just too pricey.
1 comments:
Its actually gone up 33% in a week since earnings, thats just crazy. You also have to contemplate that Amazon bought back shares to help EPS earnings in the quarter. In the third quarter they lowered their tax rate 6 points to beat. In the second quarter they booked a $53 million non-cash sale of a DVD unit that they essentially kept and no one know how they could possibly arrive at such a large valuation for it. Forex gains also added substantially to the bottom line in the second and third quarter. So it seems that Amazon is selling but their net income is suspect since they are never clean. Are they really making money ? Why won't they say how many Kindles sold just as Apple is candid about their product sales? You don't make public your unit sales unless they are poor or lower than hyped by the analyst.
Post a Comment