Shorts Dip Toe in Amazon as Analysts Say Buy at 500 P/EMichael P. Regan
This year there’s been enough talk about potential bubbles to rival an R&D meeting at Bazooka Joe headquarters. So you’d think the shorts would be tripping over each other for a piece of the most richly valued stock around.
Yet the bears are treading cautiously when it comes to Amazon.com Inc., which is currently valued at about 544 times reported earnings even after a 16 percent drop in the stock this year. The shorts have noticed the shares, but are dipping a toe in the water rather than plunging in head first.
Short interest as a percentage of Amazon.com shares outstanding reached 0.52 percent on June 16, according to data from Market Securities Ltd. While that’s the highest level since January 2013, it’s a light snack rather than a feast for speculators betting on the stock to drop.
As they say on Amazom.com, “shop now” and compare it to other short interests: U.S. Steel Corp. and GameStop Corp. top the S&P 500, with 23 percent and 20 percent of their respective shares borrowed and sold on bets they’ll fall, according to data compiled by Markit and Bloomberg. S&P 500 stocks have an average short interest of 2.2 percent, four times Amazon.com.
Analyst ratings also show few concerns about the biggest P/E in the S&P 500 (excluding unprofitable companies). The stock is rated the equivalent of buy at 37 firms, with 10 holds and only one sell. That gives it an average rating of 4.48 based on Bloomberg’s system where buys get a score of 5 and sells a 1. The score puts it in the top 10 percent of the S&P 500, where the average consensus rating is 3.84.
The general thinking is that Amazon.com’s lofty valuations reflect a smart choice to sacrifice current profitability by spending big on the future, from yesterday’s announcement of its own smartphone to ambitions of one day dispatching a drone to deliver Dingo Ringo Rawhide Treats to your pooch. Per-share earnings are forecast to jump a whopping 478 percent this year and 71 percent in 2015.
Options traders are bullish too. Calls to buy the shares this week reached the most expensive since at least 2006 relative to puts to sell, data on six-month options show.
Much of the analyst reaction to the new Fire Phone talked about how it will improve the health of Amazon.com’s “ecosystem,” meaning its online shopping mall.
A three-dimensional screen and technology that can identify audio, text and images “clearly distinguish the Fire Phone from anything else out there,” Jefferies analyst Brian Pitz and colleagues wrote in a note today. They rate the stock as a buy and expect it to rally 35 percent to $450.
“Investors must make a leap of faith that its revenue will continue to grow and will generate high contribution margins,” wrote Wedbush Securities Inc.’s Michael Pachter, who’s in the minority with a neutral rating on the stock.
Of course a leap of faith is only successful if you stick the landing. Just like the drone delivering those Dingo Ringos.