(By Karl Denninger) There have been plenty of people who have gotten smashed trying to short Amazon over the last couple of years, but I think the short side is due for its day in the sun -- in a big way.
Let's start with the simple stuff -- P/E. At well north of 200, it's ridiculous. Even being kind and using next year's "expected" earnings it's nearly 100. The company has ~$5 billion in cash, or roughly $11/share, on the balance sheet, but sells for $232/share. It does $54 billion in revenue but only posts EBIDTA of $2 billion -- and under a dollar of diluted EPS. And only a bit more than 2% of the float is out short.
Note that the current estimate for earnings growth on a 5-year forward basis is 34% annually. That's a 330% growth over five years. If we assume revenue grows ratably this makes the company a $250 billion revenue firm.
Do you believe that? The company, five years from now, will be the size of Chevron, Toyota, or Samsung, or half the size of WalMart?
I don't buy that for a minute.
Next, and possibly most-importantly, is the margin problem. I've written about this before, but the company's investors keep shrugging it off. Well, you can't forever folks. Amazon has a 1.17% operating margin. WalMart, by comparison, has a 5.94% operating margin or nearly five times that of Amazon.
And how did Amazon get where it is? It is squeezing the "partners" that provide the products it sells and worse, they wind up having compete against each other.
Think about this folks -- this is the WalMart supplier model, except that WalMart is the beneficiary of much of the tactic in their case, where the consumer is the beneficiary in Amazon's!
Finally, I believe the economy worldwide is on a path southbound and the data thus far is backing that viewpoint. If in fact we go back into a consumer-led recession as monetary and fiscal stimulus events prove ineffective, which I believe will be true, then projections of 30%+ revenue and EPS growth will prove to be fairy tales.
Back in 1999 I opined that I thought Amazon was a $2 stock. It bottomed at $4.
Today, I have to be a bit more generous -- after all, the company is involved in many other lines of business and it has $10 worth of cash on the balance sheet. And I fully recognize that the market can remain irrational longer than someone can hold a short, and thus far in regard to this company, it has.
But with a 1% operating margin, the squeeze it is putting on vendors and the inexorable march of tax policy in the wrong direction (for Amazon) I have every expectation that the shares could easily trade down to $50 over the next couple of years.
And that's if they don't make any serious mistakes.
Disclosure: The author has a speculative and tactical short position.