Is It Time to Short Amazon?

Let me make one thing clear before we go any further: Amazon (NASDAQ: AMZN ) is
here to stay. Nevertheless, one thing that has always troubled me is the
companys valuation. I remember the crazy days of the late 90s when Amazon was
rising 40 or 50 pre-split points a day, and I was shaking my head in disbelief.
Of course, AMZN shares eventually cratered like all the dot-com stocks did. The
only difference was that Amazon was, and continued to be, a viable business. It
wasnt until late 2007 that the stock revisited its old highs. However, Amazons
stock has blown through those highs and even went more than 2.5 times higher.
AMZN currently is 25% off its high of $246, but I still think its worth visiting
whether its time to short Amazon. Amazon remains a retailing juggernaut. This
years sales growth is on track to rise 42%, and analysts are looking at another
33% next year. Five-year annualized earnings estimates still are 22% even
though Amazon is more than 10 years old. It speaks to Amazons power as a
one-stop shop for, well, everything. The company grew earnings even during the
worst of the financial crisis. However, its Q3 earnings this year surprised
everyone by coming in below estimates. Profit fell 73%. That alone sounds like
reason to bail on the stock. Or is it? What was behind the profit tumble? It
wasnt revenues, which were up 44%. It was costs. There are two kinds of costs
one a company must make to keep its business afloat, such as hyperactive
advertising, and another where a company wisely invests in its future. I see the
latter with Amazon. The company said it spent $769 million (up 74%
year-over-year) on technology and content, which partially relates to the new
Kindle Fire product, and to its ramping up of its streaming content as it takes
on Netflix (NASDAQ: NFLX ). Then there was the $1.6 billion of investment in
fixed assets, including internal use software and website development. Amazon
must make these investments because the Kindle Fire is going to burden the
companys servers and back-end technology. Remember, Amazon isnt your local
retail storefront. It certainly doesnt have to deal with all the overhead
associated with such a business, but Amazon has become so gigantic that if it
doesnt invest in technological infrastructure, it will stumble badly. Amazon
must keep up with technological advances even when they happen to come
internally! Nevertheless, valuation remains a concern. If we dismiss the profit
hit because of costs this year, and look at next years earnings projection of
$2.05 per share, we see Amazon is trading at 88 times those estimates. Even
granting Amazon a PEG ratio of 2 as it represents a premium company with some
$14 per share in cash and fantastic cash flow I have a hard time buying the
stock here at $182 per share. Amazon is a great company that I would like in my
portfolio, but its going to have to get a lot cheaper before I add it. Those
considering shorting Amazon certainly have reason to do so based on valuation
and technical analysis. I would use a stop loss, however. AMZN remains a
volatile play. As of this writing, Lawrence Meyers did not hold a position in
any of the aforementioned stocks.