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Nov 29, 2016

S3 BLACKLIGHT: Amazon Hits Record Cyber Monday Sales and Short Interest

Shorting Amazon.com Inc. (AMZN US) stock has not been a winning lottery ticket in 2015 and 2016 with the stock up $456/share or 147% over that time period and only one major reversal in January-February of this year prior to this recent price slump. With online competition coming from traditional brick and mortar retailers such as Walmart (WMT US) and Target (TGT US), Amazon is seeing its year on year growth slip substantially from its 25% norm. Increased discounting and a weak economy may make it difficult for Amazon to reach its lofty targets.

Online sales is not the only revenue stream that is being threatened by increased competition as Microsoft’s Azure (MSFT US) and Google’s Cloud Platform (GOOG US) continue to threaten Amazon’s Web Services market share. In response, Amazon has recently lowered its computing and cloud storage prices to get closer to Google’s low cost platform.

Amazon’s short interest has historically been considered as both a hedge against long derivative positions and as part of a technology beta hedge.  Average short interest has been $2.1 billion from 2005 to 2015 and more recently $3.6 billion in the first six months of 2016. Short interest began to increase beyond this “core” short balance in late September with $1.4 billion of new short activity. Short interest grew to $4.8 billion in September, up 51% on the year, and has averaged $4.7 billion since then. Amazon short interest hit a historical high on November 21st of $5.1 billion, but has since dropped back down to $4.9 billion as its price fell to $766.77. After riding Amazon’s stock price from $780 to its year to date high of $844.36 on October 5th, the $1.4 billion of new shorts are now in the black on a mark to market basis.

Short sellers are looking at Amazon’s competition eating into its gross revenues and in turn it’s EPS. With Amazon’s share price valuation at over 170 times its last 12 months earnings even a slight earnings shortfall may dent Amazon’s stock price significantly. Being the bell weather for online retailing, we should see Amazon’s short interest rise and fall as holiday sales figures continue to be reported. If Walmart’s and Target’s price discounting cuts into Amazon’s bottom line, we should see Amazon’s short interest continue to hit new historical highs. Short interest nearing $6 billion would mean $2.5 billion of short sellers, in excess of the $3.5 billion of “core shorts”, betting that Amazon’s revenues underperform its past performance. 
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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