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