Amazon.com: The conundrum

Posted Apr 26th 2007 4:15PM by Georges Yared
Filed under: Major Movement, Earnings Reports, Good news, Amazon.com (AMZN)

Wall Street was expecting an in-line, somewhat decent quarter from Amazon.com (NASDAQ: AMZN) and to everyone's shock, it blew away the Street. Amazon has several issues these past few years and investors thought the story was going to keep hibernating for awhile. Wrong. Amazon's house is in order and all of the infrastructural investments put in place the last 3 years are paying off with earnings leverage going forward. Now, what does the investor do?

Here is a sample of the conversations that went on yesterday at several money management firms and hedge funds:

1) "You own Amazon right? No!! Why not? Okay, cool, you are buying it now." "Good, we want that on the April 30th stock position sheet so our clients will think we are smart!!! Good job, Al"

2) " What do you mean you are short Amazon!! Get it covered now!! We cannot show that position as being short for month end!! What are you nuts?!! Who cares what we lose, just cover it!!" " I knew you were wrong Ralph. My kids buy stuff from them!"

Oh, how I have heard these conversations so many times.

So what happens is the convergence of two desperate groups. Pre-first quarter numbers release, many felt Amazon was fairly to even a bit over-valued. Now all the metrics have changed and the company literally has a new and better financial model. Couple this with the fact that Amazon is the category killer, which is always worth a few extra PE points, and the stock has skyrocketed. The volume traded is huge these past two days and all portfolio managers are perfecting the art of the lie. "Sure, I owned some. I am just topping off the position." Yeah right!!

My distinguished fellow AOL blogger Sheldon Liber has written an elegant post stating that Amazon is now really expensive. My dear Sheldon, you are correct. Would I want to throw fresh money into Amazon here at $59? No, I'll wait for the shorts to finish covering (which by the way, the brokerage firm trading desks are just drilling them. But that's a whole other story!) and the desperate longs to finish "topping off," let the stock then settle back to the low $50's and then we'll talk...

Georges Yared is the CIO of Yared Investment Research where he explores more growth stock ideas.

Tags: AMZN