The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, October 25, 2006
Email – #345
** Amazing Amazon – continued
Shorting Amazon (Nasdaq: AMZN) is not an easy thing to do. It is a Wall Street darling – has been for ten years now.
What has not changed about Amazon is its valuation. It is overvalued on just about every metric, from price to book (37 times), price to sales (1.3 times) and most importantly, price to earnings (over 60 times).
The company released its earnings last night, and the shares popped by 10% today.
Here’s what the numbers showed:
First, the company’s margins are nothing short of pathetic, and are not showing much improvement. Guidance going forward was also a downer.
Look at the net income: It earned $19 million on revenue of $2.31 billion. If that is not bad enough, it was $11 million less than the same quarter last year. The net income, of 5 cents per share, beat estimates of 3 cents per share… big deal…
That means that Amazon earned less than 1% in net income on sales. Yet the company is valued at over $15 billion in market capitalization, over one times sales, and more than 60 times forward earnings.
On a stand-alone basis, these numbers are bad enough. But when you compare them with other Internet-based businesses, it gets even worse.
Take Google (Nasdaq: GOOG) and eBay (Nasdaq: EBAY) as examples of other net platform companies.
They are making money hand over fist. eBay made $280 million last quarter on sales of $1.45 billion. And Google made a whopping $733 million on sales of $2.7 billion. These two companies deserve higher valuations on all metrics because they are the dominant players in their space – they are growing revenues, growing earnings and enhancing shareholder value.
Amazon is a low margin retailer that faces tremendous competition. It has managed to claw a profit by subsidizing purchases with its low shipping costs. But in terms of dominance and innovation, the company has limited options.
It has tried to become a search engine, a project that it invested millions of dollars to set up. The result: it has about 0.1% of the search market.
It has tried to penetrate the video/dvd market – with no success. It is now trying to sell groceries on-line… another high-margin business!
Amazon is not even a good retailer compared to the box stores. Their margins and income are higher even without the huge technology investment.
Amazon has surprised investors this quarter by not reporting numbers as bad as were expected, and by predicting a strong Christmas season.
But… then what? At some point investors will refocus on valuation, growth and earnings. When that happens, if they miss any part of their projections (and the company has a history of missing its numbers), then watch out down below.
The Street is infatuated with Amazon and Jeff Bezos. But, as with all infatuations, it can end quickly… and badly.
We are shorting Amazon, looking for the current euphoria to come to an end in the coming weeks. We may be early… but in this case, the numbers and fundamentals just don’t bear out.
Amazon’s only hope at sustaining a higher valuation is to be bought out by someone even more desperate to make 1% on their investment.
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Current Portfolio:
Company / Symbol: Amazon (Nasdaq: AMZN)
Option / Symbol: Jan 08 $30 put (WEW-MF
Date Purchased: 10/25/06
Current Price: $2.15
Comment: New today. Buy at $2.30 or better.
Company / Symbol: Nordstrom (NYSE: JWN)
Option / Symbol: Jan. 08 $40 put (YJY MH)
Date Purchased: 9/26/06
Current Price: $2.65
Comment: Hold.
Company / Symbol: Equity Office Properties (NYSE: EOP)
Option / Symbol: Jan. 09 $30 put (OLH MF)
Date Purchased: 6/22/06
Current Price: $0.95
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $2.00
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $12.21
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $3.00
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $2.35
Comment: Hold.
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $45 call (VVV AI)
Date Purchased: 6/21/06
Current Price: $1.40
Comment: Hold. Sold call against January 09 $35 call position.
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15.00 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $1.90
Comment: Hold
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $1.20
Comment: Hold. Sold call against Feb. 07 $15 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $4.90
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $2.60
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $2.35
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $1.20
Comment: Hold. Sold call against January 08 $40 position.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ MM)
Date Purchased: 3/1/05
Current Price: $0.15
Comment: Hold.
Company / Symbol: Energy Select Sector SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ MK)
Date Sold: 3/30/05
Current Price: $0.25
Comment: Hold. Sold put against January 07 $39 position.
