Thursday, October 23, 2008

Ridiculous Analysis of Amazon - Honestly

If you've been following my writing you know that I had been short for a while but covered the position on October 8th. The thesis was simple. We're in a recession, the company is highly leveraged to the highly leveraged consumer, and the stock was trading at a very rich earnings multiple.

I, therefore, didn't find the company's earnings report last night terribly surprising. Earnings came in a little better than expected and sales were pretty much in-line. The more relevant issue is that the company guided fourth quarter revenue expectations to a range of $6.0-7.0 billion. Analysts had been expecting $7.0 billion. Not surprisingly, the stock is down today. Despite falling 13-14% pre-market, AMZN has been down in the mid-single digit percentage range for most of the day (thus far). Expensive stock + company guiding lower = lower stock price. Nothing too shocking there.

Or so I thought. Then I stumbled upon an article written today by Glenn Hall of Glenn seems a bit perplexed that the shares are down at all today. In his piece entitled "Today's Outrage: Amazon Honesty Has Price," Hall states, "OK, so Amazon's range was a little wider than usual. And CEO Jeff Bezos didn't inspire much confidence when he explained that 'all companies have limited visibility now.' I guess that merits a sell-off. Such honesty is outrageous!"

So, if I understand Mr. Hall correctly, Amazon's stock should be rising today because the CEO was honest about how lousy business is likely to be. Interesting analysis. They should be rewarded for being honest about bad news. Isn't that like saying your wife should love you even more if you're honest with her about how unfaithful you've been? Or promoting an employee who admits to embezzling from you?

What about the fact that the mid-point of the revenue guidance is a whopping $500 million below estimates? I guess we just ignore that. Why worry about silly things like revenue and earnings when it's honesty that drives security prices. True, Amazon's price/earnings multiple may be rich, but on a price/integrity basis, the stock is clearly a buy! When we couple Bezos's honesty with the fact that he didn't kill anyone this past quarter (to the best of our knowledge), Hall must be amazed that AMZN isn't the leading percentage gainer today.

This is the type of person and analysis that I always hope is on the opposite side of my trades.

Disclosure: The Rubbernecker has not killed anyone this past quarter either and is looking forward to shorting AMZN again.

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