AMAZON.COM INC AMZN S
June 15, 2010 - 10:50am EST by
heffer504
2010 2011
Price: 125.00 EPS $2.95 $3.90
Shares Out. (in M): 455 P/E 42.0x 32.0x
Market Cap (in $M): 57,000 P/FCF 0.0x 0.0x
Net Debt (in $M): -5,000 EBIT 0 0
TEV ($): 52,000 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Description

 

I am recommending a short sale of Amazon.com.  Here are the main points of the thesis:

 

1)  The business is viewed as a growth business yet over half of its sales are from "media", which will be increasingly digitized over time.  DVDs, CDs, and books are all declining at a mid single digit rate, which is likely to accelerate as tablet devices penetrate the market.  Shrinking DVD windows and increased VOD offerings will make the next few years very challenging.  I believe that this business should receive a low multiple as a result, probably under 10x eps.

 

2)  International sales are roughly half of the total, and are concentrated in the UK and  Europe.  The euro averaged 1.47 in 2008, 1.39 in 2009, and is now at 1.23; the pound averaged 1.85 in 2008, 1.57 in 2009, and is currently at 1.48.  This should lead to at least a 5% headwind on the international business.

 

3)  The Kindle is dying a slow death at Apple's hands, and will likely slow considerably in coming quarters.  This should never have been a large component of Amazon's valuation, but I believe it drove some hype in the last year.

 

4)  Electronics is slowing down, according to most reports out of Asia, and Best Buy's recent quarter. 

 

5)  Implementation of an internet sales tax is a matter of when, not if.  While Amazon's lobbying has been successful so far, it is a foregone conclusion that these will be implemented, as state budgets need any revenue they can find.  An internet sales tax also has the appeal of being a tax that is already in the books but needs to be enforced, and one that benefits local retailers.

 

6)  Shipping rates are going up.  Amazon will spend around $2.2b on shipping this year.  The USPS is considering raising rates and UPS has discussed some success in increasing pricing for the first time since 2007. 

 

7)  Amazon will likely meet or slightly beat this quarter's "Street" estimates, but guidance is at risk.  In the 2001-2007 timeframe, the average sequential seasonal change from Q2 to Q3 is 5%, which a high degree of stability.  Estimates for Q3 revenues imply 9% sequential growth.

 

8)  This is not that predictive, but interesting nonetheless:  people seem to be searching for amazon.com quite a bit less as of late:

http://trends.google.com/trends?q=amazon.com&geo=usa&sa=N

 

9)  Technically, this stock can crack $115 and have no "support" until $85

 

10)  The stock earned $900 million  last year, and you could argue this is overstated due to the low tax rate being paid.  The company notes that they are under investigation by a number of tax authorities, and have continuously reserved for tax liabilities.  Say you apply a full tax rate to this number to get $700 million of net income, assume the books and DVD business should have a 10x multiple and is half the net income (it is almost certainly more), then the remaining business is being valued at 140x earnings. 

Catalyst

Q2 results show disappointing guidance due to revenue, currency, and cost trends
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    Description

     

    I am recommending a short sale of Amazon.com.  Here are the main points of the thesis:

     

    1)  The business is viewed as a growth business yet over half of its sales are from "media", which will be increasingly digitized over time.  DVDs, CDs, and books are all declining at a mid single digit rate, which is likely to accelerate as tablet devices penetrate the market.  Shrinking DVD windows and increased VOD offerings will make the next few years very challenging.  I believe that this business should receive a low multiple as a result, probably under 10x eps.

     

    2)  International sales are roughly half of the total, and are concentrated in the UK and  Europe.  The euro averaged 1.47 in 2008, 1.39 in 2009, and is now at 1.23; the pound averaged 1.85 in 2008, 1.57 in 2009, and is currently at 1.48.  This should lead to at least a 5% headwind on the international business.

     

    3)  The Kindle is dying a slow death at Apple's hands, and will likely slow considerably in coming quarters.  This should never have been a large component of Amazon's valuation, but I believe it drove some hype in the last year.

     

    4)  Electronics is slowing down, according to most reports out of Asia, and Best Buy's recent quarter. 

     

    5)  Implementation of an internet sales tax is a matter of when, not if.  While Amazon's lobbying has been successful so far, it is a foregone conclusion that these will be implemented, as state budgets need any revenue they can find.  An internet sales tax also has the appeal of being a tax that is already in the books but needs to be enforced, and one that benefits local retailers.

     

    6)  Shipping rates are going up.  Amazon will spend around $2.2b on shipping this year.  The USPS is considering raising rates and UPS has discussed some success in increasing pricing for the first time since 2007. 

     

    7)  Amazon will likely meet or slightly beat this quarter's "Street" estimates, but guidance is at risk.  In the 2001-2007 timeframe, the average sequential seasonal change from Q2 to Q3 is 5%, which a high degree of stability.  Estimates for Q3 revenues imply 9% sequential growth.

     

    8)  This is not that predictive, but interesting nonetheless:  people seem to be searching for amazon.com quite a bit less as of late:

    http://trends.google.com/trends?q=amazon.com&geo=usa&sa=N

     

    9)  Technically, this stock can crack $115 and have no "support" until $85

     

    10)  The stock earned $900 million  last year, and you could argue this is overstated due to the low tax rate being paid.  The company notes that they are under investigation by a number of tax authorities, and have continuously reserved for tax liabilities.  Say you apply a full tax rate to this number to get $700 million of net income, assume the books and DVD business should have a 10x multiple and is half the net income (it is almost certainly more), then the remaining business is being valued at 140x earnings. 

    Catalyst

    Q2 results show disappointing guidance due to revenue, currency, and cost trends

    Messages


    Subjectearnings growth assumptions
    Entry06/15/2010 01:56 PM
    Membersurf1680
     
    The market price of amazon assumes that earnings growth will stay on current 40% trajectory for 5 years (vs. a market that isn't particularly cheap, either).

    Subjectnice trade
    Entry07/22/2010 05:52 PM
    Membersag301
    this was a nice idea.  i was too chicken to do it as shorting these amazing types of tech companies at any valaution scares me, but i thought the thesis was compelling that they would miss estimates.  anyhow looks like it worked out well for now. 

    Subjectheffer, any thoughts on the quarter?
    Entry07/23/2010 02:33 PM
    Membertyler939
    thanks.

    SubjectRE: heffer, any thoughts on the quarter?
    Entry07/30/2010 04:04 PM
    Memberheffer504
    thought it was terrible and demonstrates the thesis perfectly.  it will only get worse for them from here.  the fact that the stock traded to 101 and closed flat is a travesty...  IMHO

    SubjectRE: next catalyst
    Entry10/12/2010 07:41 AM
    Memberheffer504
    well, i think that the quarter will be weak again.  remember, half of their sales are from physical media.
    so-
    - weak q2 movie release means weak q3 dvd sales, the data shows a sharp drop off, plus increase in nflx/vod hurts http://www.the-numbers.com/dvd/charts/annual/2010.php
    - book sales negative mix as kindle editions priced 30% lower
    - tv sales dropped off a lot this q as shown by many semiconductor companies
    - normal seasonal gain from q2 to q3 is 5%, street is at 12%
    but they missed last q also and stock dropped 15% for half a day then rebounded quickly, so what do i know...

    Subjectthe growth mentality
    Entry02/14/2011 08:44 AM
    Memberheffer504
    has now firmly embraced revenues as their metric, with no regard to anything else.  so, amazon gives stuff away for free and people buy it, and that drives the stock.  it is the same thing with any cloud, tablet, social media, etc etc.  check out Cramer's FADSCAN picks...

    SubjectAnyone still following?
    Entry09/29/2011 12:53 PM
    MemberToby24
    Thoughts on the current valuation?

    SubjectRE: Heffer - any updated thoughts?
    Entry05/08/2012 12:57 PM
    Memberheffer504
    the crux of the thesis on this was that earnings would decline.  this has happened (in spades) but no one cares.  if and when people care about the earnings here, this will again be a short.  until then, i'm not sure what breaks it...
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