Short or Long Amazon.com Inc?

Cyber Monday

Einhorn's latest short thesis has this stock buzzing.

Amazon Inc. (AMZN) the most successful U.S. online retailer rakes in billions in revenue yet never makes a penny of profit. It seems every few months the company is offering some cool new device, platform or service. It has proven to be a leader in the web 2.0 revolution, but what does that mean for shareholders?

If you are looking for a reason to buy, sell, short, or take a chance and just buy puts or longs on Amazon it's a mixed bag.  Meaning there are great arguments as to why this stock looks attractive and even more reasons as to why you should go short or just avoid it. After the company recently disappointed the Street the stock dropped an unprecedented 10% in a single day.  

amznForget what you think you know, the fact is AMZN shares are now stuck at the $300 share price.  They don't want to budge over it and they don't seem to want to stray far from it.  How long will it be stuck at $298 to $299.99?  If it does break through $300 does that mean it will gather momentum and keep going higher? Amazon is trading 5% from its 52-week low, a point it hit just a few weeks ago. After reviewing all the analyst recommedations the stock is either going to hang out at $300 for the next 12 months or get as high as $350. This of course is a conservative estimate because with all the heat on this stock there's no point dreaming about it at $400.

They just thew away a shit ton of money on the Fire Phone that nobody, and I mean nobody wanted. The latest numbers on the Fire is that it grabbed "less than 1% of the market". The Fire TV stick could get some buyers for it's cheap entry point ($39).  The Echo?  I'm not sure any of us know what to do with it besides watching the video and saying "Well that's kind of cool, but what the hell am I going to do with that".  You buy that device, do some drunk demo for your friends and 2 months later forget all about it, Alexa who?  Video below, how much did they spend on this and did they think we wanted it?

Let's review a heavy hitting hedge fund manager who didn't have kind words about Amazon.com.  On Nov 5th:

  • David Einhorn was much less kind to Amazon (AMZN -1.2%), asserting the company's latest numbers are especially disappointing since they suggest the growth used to justify a dearth of profits is slowing, and in doing so is yielding higher losses.
  • Einhorn: "One of the principal bullish assumptions supporting many bubble stocks is, 'the company is growing too fast to be very profitable.' We think AMZN is just one of the many stocks for which this narrative will ultimately prove false."
  • Einhorn doesn't explicitly state he's short Amazon, though he does say Greenlight increased its exposure to "bubble basket" shorts in Q3.

 

It's easy to agree with Einhorn. Amazon is into everything (groceries, books, media streaming (video/music), retail, cloud (cloud services), search, etc) and how can they hit their numbers on every business area? Bezos is a control freak, he's not splitting up the company.  They spend billions on R&D.  How much will they spend on flying drones when the Powers-that-be will probably keep those grounded in major U.S. cities?  More importantly when will they ever post a profit? Can they actually make a penny or nickel after all their bills are paid? When the hell will that happen? It's been a long 20 years.  Dude, seriously.  Where's my penny yet alone my car?

WHY GO LONG?

The dumb Echo, they are thinking someday we may want it. AmazonFresh - Same-day and early morning delivery of fresh grocery, everyday essentials, local products.  Something we may all want someday and come to expect. Flying delivery. You get the point.

They are all over trying to figure out the next big thing that we all want. They are the runner up to Netflix (NFLX) but they want to be No. 1 with a future product or service. The Fool.com wrote a great piece on this and the main reason why I would go long on AMZN at $300.

According to The Wall Street Journal, Amazon's first store in Manhattan will be used for product returns, order pickups, warehousing, and its grocery initiative called Amazon Fresh. During Amazon's third quarter, fulfillment costs surged nearly 30% year over year to $2.64 billion. It's not getting any cheaper for Amazon to process online orders, package them, and ship them to consumers.

...

Online grocery sales are expected to skyrocket from $27 billion last year to $123 billion by 2023, according to BMC. That's still small compared to the $574 billion U.S. grocery market. Amazon has a great opportunity to be the biggest name in online groceries due to its e-commerce presence, but part of that success might very well derive from the advantages of brick-and-mortar in shipping, warehousing, and customer service.

...

Amazon might have settled for keeping its Instant Video service small, more like a minor bonus for Prime members, but that's clearly not the path that management is taking. The company spent $100 million on original programming just last quarter and has a number of new pilots and original series on the way.

The payoff to the business so far has been in boosting the membership rolls of the Amazon Prime service, which we know tends to result in higher spending per user once customers buy into it. In fact, in the Q3 conference call, management explained that people who use Prime Instant Video renew their memberships at "considerably higher" rates. That tells me that Amazon will have no reservations about continuing to boost its video content spending to levels approaching Netflix's multibillion-dollar annual outlay.

 

mastery bottom line

Mastery bottom line: Holiday shopping is upon us, AMZN shares will probably get a bump from it. Long term the stock looks cheap but it has to impress Wall Street otherwise it's dead money.

Mastery 12 month price target: $345

Disclosure: The authors of this publication have a long interest in AMZN.