Conclusion: AMZN already had a favorable TREND and TAIL setup. Now it scores the trifecta by working within our near-term TRADE framework as well. As with all TRADES, it might be a short-lived event. But do not ignore the power of the story across our TREND (3 months or more) and TAIL (3 yrs or less) durations.
TRADE (30 Days or Less)
Keith added it to the Hedgeye Virtual Portfolio as he was looking for names levered to US Consumption with favorable TREND and TAIL setups. In Retail, AMZN clearly fits that bill.
From a near-term perspective, AMZN does not have all the characteristics we’d ordinarily look for in a long idea at face value. First off, while 2Q estimates appear to be in check, this is a company that's not afraid to miss. It's happened in 3 of the past 10 quarters. With the company going up against a 51% revenue comp this quarter, the hurdle is a big one.
From a sentiment standpoint, of the 41 Analysts, there are no sells, and the 71% ‘Buy rating ratio’ just set a 5-year peak. Yes, this definitely concerns us, especially with AMZN facing its toughest yy revenue growth compare in 2Q (51% growth in 2Q11). Its trough, fyi, was 21% in 1Q 2007.
TREND (3 Months or more)
But make no bones about it... after the 2Q print, revenue compares start to ease, while margin compares start to get quite easy effective immediately (including 2Q). Margins were cut in half last year to 1.8%, with an even distribution across quarters. People beat Bezos up – as usual -- for that investment. But now he has Fire, expanded DC capacity, a new B2B initiative...
We’ve been at a point where AMZN has had Eight quarters is a row where inventories grew faster than sales. Note that this is at the same time capex as % of sales ramped by another 90bps to 3.8%. None of this is sustainable, and ultimately very bullish for cash flow and therefore, the stock.
In the back half of this year, our estimates are 10% above consensus.
TAIL (3-years or less)
Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years. Capex is inflated, margins are depressed, and while sentiment has rebounded considerably from the latest 1Q upside, the fact of the matter is that estimates for next year are likely low as investments today drive sales and margins tomorrow. For a world class franchise like AMZN, you generally don’t want to get in the way of that. The ‘it’s too expensive’ call simply holds no water when the company can earn the $4.50 2014 consensus estimate a year early.