Monday

Ready to Short Amazon

2 Comments February 1, 2010 – 9:17 am |   | Permalink |  Print This Post |

Dow futures are up 0.5% at 10110. This is looking good. We prefer an up move preopen when we think its going down, and vice versa. We also checked on Amazon after a colleague bought a Kindle. Looks pretty cool - but at $300 AUD, I think I would rather buy an iPad. Apparently Amazon’s share price went back up after iPad’s launch as investors were disappointed with the iPad - which is just like a big iPhone (hence not a true reader/competitor to the Kindle). After playing around with the Kindle (which we are actually quite impressed with), we went on to research Amazon. Our findings give us compelling reasons to take action - we will short Amazon. Here’s why:

• IT has a PE of >50! Buoyed by optimism of Kindle, sales of ebooks, etc. It is crazy. Yes, it has great growth, but we don’t believe it should trade at a PE of 54.
• Ipad will take some market share. The question we ask ourself is this: if we bought an iPad, would we still buy a Kindle? Some may, but I definitely won’t be carrying both around. So I have no doubt Apple fanatics out there who line up overnight for new Apple products will cause a dent in Kindle sales (and more importantly the ebooks they subsequently buy which Amazon makes a huge margin on).
• Cannibalising of sales. Media was all over the fact that Amazon sold more ebooks than books in December. This is actually cannibalizing sales of books (admittedly, margins are ALOT better selling ebooks with zero shipping, storage, material costs).
• Amazon sells alot more than just books. Yes, thats why we went through their presentations to see how much of their revenue is derived from Kindle/books. We could not find that information. Please enlighten us if you know the answer to this.
• Ebay’s PE is about 12 , Google 22-23, Apple 25, and Walmart 15. Why the hell would you invest in something with a PE of 54?!!!! I’ll bet Google and Apple will have greater growth than Amazon.

Amazon’s Price Action

Amazon Chart

Comparing Amazon vs Ebay vs Google vs Apple Share Price Performance: 2005-2010

Peaked at about 140, currently 125. We are hoping for a double top, but will start shorting lightly from here.

Strategy

1. Short Amazon from 125 - 140 (hope for double top)

2. May hedge with a long Google and/or Apple by the same amount