Wednesday, January 30, 2013

AMAZON @ $275 -- Someday Never Comes

Like most consumers, I like as a customer.  Unlike many however, its a like, not a love.  I can live with it, or without it.

For too many investors and traders, they love Amazon (AMZN) as a ticker that defies gravity.  To them, and the crooked disingenuous sell-side analysts that relentlessly pump up this stock, Jeff Bezos is a genius, with a master plan for profits "someday" in the distant future that never seem to materialize.

Never mind the fact the Bezos is pretty much a no-show as a CEO these days.  He makes limited public appearances, is typically not involved in earnings conference calls, and seems focused on personal venture capital investments and space ventures.

Is Amazon disruptive to other businesses?  Yes it is.  However, Amazon faces fierce competition on every front, from multiple competitors who are not going away and have learned how to better compete.  Wal-Mart, Target, Apple, Google, Oracle, SaleForce, NetFlix,  Best Buy, Barnes & Noble, Drugstores, Groceries, on and on an on.  To believe that companies and sectors will simply cede the field to Amazon is beyond lunacy.

As state sales tax exemptions for internet companies disappears, Amazon will also lose an important pricing advantage.  Its margins, even if they improve somewhat over time (not a given) will likely remain unimpressive as they compete in many low margin, commodity businesses.

I am not going to rehash Amazon's poor financial performance in detail here, that information is available all over the financial internet.  However, I do note a few of the many very salient observations below:

First Adopter @FirstAdopter points out via Twitter:

1 yr ago when  was $100 lower street est. for Q4-12 +39% y/y sales growth, GAAP EPS 85c, Non-GAAP EPS $1.23. AMZN reported +22%/21c/46c

Josh Brown (The Reformed Broker) has a piece here:

Zero Hedge chimes in with:

Amazon Misses, Growth Slows, Guides Lower, P/E Goes Negative And Stock Soars

The most cartoonish stock of all time just came out with results that can only be characterized as WTF. To wit:
  • Q4 revenue of $21.27 billion missed expectations of $22.23 billion
  • Q1 EPS of $0.21 missed expectations of $0.27;
  • The firm guided top-line lower, seeing Q1 sales of $15-$16 billion, below the estimate of $16.5 billion
  • The firm guided operating income much lower, seeing Q1 op income of ($285)-$65 Million on expectations of $261.4 MM
  • The firm said the its physical books sales had the lowest growth in 17 years
  • Total employees grew by 7,000 in the quarter and 32,200 Y/Y to a record 88,400
  • Worldwide net sales Y/Y growth was the slowest in years at 23%, down from 30% in Q3 and 34% a year ago
  • And, last and certainly least, LTM Net Income is now officially negative, or ($49) meaning as of this moment the firm with the idiotically high PE has an even more idiotic N/M PE.

I see absolutely no reason for AMZN to trade at such ridiculously lofty levels, reflecting a valuation that it almost certainly will never grow in to.  Wall Street is supposed to be a fair and efficient market.  It isn't.  Yes, those in the know can make money participating in the silly momentum games with the stock.

Ultimately, however, the rug gets pulled, and real people lose real money.  Lots of money.  Think of all the mom and pops that own Amazon directly, or indirectly in mutual funds, ETFs and 401ks.  They are being relentlessly and cynically sold on the idea by almost every Wall Street firm that Amazon's tree will grow to the sky.

With that said, here is what could happen to Amazon, sooner than most people think:

1.  The market may finally give Amazon a long overdue valuation adjustment.

2.  It very well could experience a stock price adjustment equal to, or greater than the one Apple experienced - at least a 38% decline from its all time highs.  That would take Amazon's stock price down to $175, perhaps much lower.  Even $175 would be a level that would still be difficult to justify from a valuation standpoint.

3.  Hedge funds and other sophisticated investors will participate in this trade by going LONG Apple, and SHORT Amazon as a pairs trade.  Not only are ALL of Apple's financial metrics vastly superior to Amazon (earnings, cash flow, balance sheet, etc.), but Apple has just experienced a vicious valuation adjustment.  Perhaps Amazon will be next.

Meanwhile, until Someday happens, enjoy the music, courtesy of Credence Clearwater Revival:

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