Amazon.com, Inc. Stock Is Definitely Not the Stock to Short
If Morgan Creek Capital, CEO, Mark Yusko really stuck to his public statement that he would short Amazon.com, Inc. (NASDAQ:AMZN) stock at $1000 a share, well then, he’s already in the hole.
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Post third-quarter-earnings alone, AMZN share price has jumped 12%, an almost vertical ascent. And a support level seems to have established itself around the $1100 per share mark. That brings the YTD performance for the Jeff Bezos’s behemoth to 47%.
While at current prices, valuation feels a bit steep for comfort, I don’t know that shorting is the way to go here. There’s simply too much positive sentiment propelling the momentum and that combination is bad news for those on the short side.
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At best, it’s a risky move as Amazon continues to capture the market’s imagination.
AMZN’s Third Quarter
Before we get to the numbers there’s a host of things to be excited about technologically and across new business lines. Amazon is expanding geographically, so even though news tends to center over its domestic search for a home for HQ2, moves for Amazon Business into Japan and India are already in place.
And as if there weren’t already enough going on at AMZN with television streaming, books, private label retail, and music, Amazon has launched an eponymous Wind Farm in Texas. The Amazon Wind Farm generates over 1,000,000 megawatt hours of clean energy annually from over 100 turbines. In addition to wind, Amazon also has solar projects that are currently live. Another few dozen projects on the clean energy front are also in the works. While I’d put this into an Alphabet Inc (NASDAQ:GOOGL)-esque “other bets” kind of bucket, it shows the sheer vastness of Amazon and its ambitions.
The sky is the limit is an oft used phrase to the point of being tired, but investors should take note that the enterprise is more than just its dominant online and mobile platform. Amazon is essentially redefining that old saying.
AMZN Earnings
It was an impressive quarter with sales up 34%. Naturally part of the uplift can be attributed to the absorption of Whole Foods Market and its sales figures, but excluding WFM, net sales would still have posted a 29% increase. As AMZN tinkers with Whole Foods pricing with assumed volume improvement, that sales contribution percentage should steadily increase as well.
Don’t expect the growth to slow next quarter either. AMZN has guided a net sales range of $56 billion to $60.5 billion, representing 28% to 38% year-over-year. Amazon and its stock price will continue to defy gravity so long as they can continue to sustain these growth figures while maintaining cash generation capabilities.
Frankly, the market seems to care less about the latter part than continued growth, but you still need to keep an eye on that free cash flow. It is what will determine Amazon’s financial bandwidth to pursue new white spaces and reinvest internally. The profitable deployment of this cash flow is ultimately what determines returns for shareholders.
Final Note on Alexa
Despite mindboggling growth rates, I don’t think that the third quarter performance came as a surprise.
What did surprise me though was just how crucial a component Alexa is becoming. It’s the early innings, which I myself underestimated. From Bezos himself:
“In the last month alone, we’ve launched five new Alexa-enabled devices, introduced Alexa in India, announced integration with BMW, surpassed 25,000 skills, integrated Alexa with Sonos speakers, taught Alexa to distinguish between two voices, and more. Because Alexa’s brain is in the AWS cloud, her new abilities are available to all Echo customers, not just those who buy a new device.”
Active customers have pentupled (up 5x) and the Alexa experience is constantly improving. Monetization seems to also have significant runway as AMZN tries different bundling techniques the Fire TV with Alexa Voice Remote for $69.99 or free outbound calling to any number from Echo devices.
Amazon will continue to do what it does best: disrupt. Shareholders meanwhile, are in for the ride of their lives, valuation notwithstanding.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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