Every Reason I have for a Potential Amazon Earnings Meltdown

There is this strange feeling I have on Amazon (AMZN) into its earnings tomorrow, the same strange feeling I had before suggesting to clients to avoid Chipotle (CMG) and Netflix (NFLX) into their quarterly announcements. The feeling I have is that a stock with a cult following on Wall Street and amongst retail investors (buy what you see, right?), which causes an excessive valuation, is at significant risk of disappointing the investment community with its latest earnings. Considering the valuation dynamic and present market conditions, such a stock will usually get crushed in response to anything deemed subpar in the quarter and outlook. On Amazon, while the Street touts “momentum” behind Kindle Fire hardware and content, and the positive “showrooming effect” in the battle with large box retailers, I am not recommending clients add the stock as a long position in the discretionary part of the portfolio I manage (www.decodingwallst.com). If anything, it may be a wiser decision to dabble in a short position or flat out avoid the madness. Here is why… •Since Amazon's first quarter earnings release in April (stock popped, resetting expectations higher after downbeat commentary in the lead up), only 33% of the 39 analysts covering the company have reduced full year earnings estimates. Que pasa? Amazon's second quarter guidance for a 240 bps negative hit to revenue from currency translation alone should be enough to ratchet earnings estimates down, if multinational reports have been any indication thus far. Decoded: analysts have not laid the groundwork for an upside surprise on second quarter numbers due to currency translation and international unit headwinds, and these are just the top line considerations. Should there be top line letdown, rest assured there is bottom line letdown lurking from more competitive prices to drive slowing unit growth, a runaway commitment new headcount, and ongoing investments in Italy and Spain (eek). •UPS (UPS) noted a majority of its volume improvement was fueled by large e-commerce customers (obviously Amazon) shipping low weight residential packages. I want to put two and two together on Amazon shipping heavier, higher ticket products to customers plus selling more services in the U.S. as a means to offset risk from currency translation and core international trends (FedEx and UPS international volumes were weak, further adding to concern on Amazon). •There is notable investment in services and content occurring at Amazon, equating to the eating of costs upfront, at a time of moderating global consumer spending. No good. •Amazon often issues “appropriately conservative guidance.” Do that in this market with a richly valued stock and expect it to get ugly on the trading floor. •Management has tried to explain the slowing of inventory turns is a reflection of expanded selection, greater in stock positions, and new categories. Perhaps. But, I see it as more “stuff” sitting in the expanding list of warehouses that creates margin risk in a weakening global macro climate, and a recipe for free cash flow disappointment (sub-par earnings + ongoing aggressive investments = free cash flow risk).