An Attractive Entry For An Amazon Short

Before the open this morning, Citigroup analyst Mark Mahaney upped his rating on Amazon (AMZN) to “Buy” from “Hold” and raised his price target on the stock to $119 from $95 (AMZN closed Monday at $92.64).  He cites consolidation in the stock since July and a toning down of expectations for long term operating margins.

His ratings increase has given Amazon some pop today in an otherwise down tape and, in my opinion, provides an attractive entry for a short position.

If you’re like me and believe we are heading for a recession and global slowdown, or even if you just want to hedge your position and have some exposure to the downside in an expensive stock, Amazon is an attractive short. 

It is, after all, a retailer.  Amazon makes most of its money selling books, DVDs and CDs (64% of total revenue for the last 4 quarters) and a good chunk from electronics and other general merchandise (33.4%).  In other words, it is completely dependent upon consumer spending, and mostly US consumer spending (55% of total revenue for the last 4 quarters).

US consumer spending is poised to slowdown as the air comes out of the housing market and if the rest of the world is affected by a US slowdown, international consumer spending at Amazon should slow down as well.

So Amazon’s business momentum, which it must be admitted is phenomenal, is poised to slow in the face of these macro headwinds.

Further, valuation has gotten a little rich.  Amazon trades for 41-42 times trailing 4 quarters free cash flow and 31-32 times forward free cash flow estimates.  That’s not awful expensive for a company growing as fast as Amazon – but it is expensive.

Analysts are mixed on Amazon with 11 buys, 12 holds and 3 sells.  There is a sizable short contingent as Amazon is one of the most heavily shorted stocks on the Nasdaq and 7.6% of its outstanding shares are sold short.

Disclosure: Top Gun is short Amazon (AMZN)

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