(By Jason Kelly) The following is from the August issue of
The Kelly Letter, which went out to subscribers last Sunday morning.
I wrote two weeks ago about Amazon (AMZN):
"Amazon, despite being a company I love, is a stock I hate. From $247 last October, it fell to $180 by the end of last year during its strong Christmas season. It recovered to $210 in March, collapsed to $184 in April, shot to $234 at the end of April and into May, and is now at $218. On a rise into much more strength, I think it's a short candidate. I wouldn't pay more than $150 for it based on its sales projections and iffy margins. It's constantly fighting a battle of low margins because it must beat the likes of Wal-Mart (WMT $73) on price even when factoring in shipping. This is why Amazon has always been a low-profit operation, with high P/E ratios such as its current 180. Yes, 180. Profits slipped 35 pct last quarter."
The company reported a 96 pct drop in 2Q earnings on Thursday and forecasted more losses to come because expenses are rising as it invests in a wider network of distribution centers. For this quarter, it expects a loss in the range of $50-350M on revenue of $12.9-14.3B. Needham said it understands that Amazon is investing in its infrastructure. "We know that Amazon is going to have razor thin operating margins, but what we don't know is if we're ready for them to have no [operating] margins."
Goldman thinks Amazon's operating margin will bottom later this year and reach 3.7 pct in 2013, and Nomura seconded the notion that margins will rise. This quarter's North American segment results showed a 0.7 pct increase in operating margin to 4.7 pct, so they may be on to something. Forrester Research added that it's a consistent story: "Grow market share and don't worry about earnings. They have the reach and scale that makes them now formidable, but when will they use that to grow more profitably?"
Not in the short term, if our suspicions are correct — and so far they are.
The stock rose 4 pct last week and is up almost 9 pct since we became interested in shorting it two weeks ago. Now that its chart sports a triple-top breakout above $230 sure to get technicians excited, it stands a good chance of reaching last October's peak at $247. Look to short it at more than $250.
