Stock Price Charts

People keep asking whether AMZN is a buy here. The question I ask instead is whether Amazon.com Inc. is a compounder. And the answer is yes. ROIC is consistently above 20 percent. Reinvestment runway is deep. Management has proven they can allocate capital at high rates of return. That is the formula. Everything else is noise. The thing nobody talks about with compounders is that the multiple rarely looks cheap. You know why? Because the market eventually figures out that these businesses are special. The multiple stays elevated because the earnings keep growing into it. If you wait for a cheap multiple on a great compounder you will wait forever. I learned that lesson the hard way with several names I passed on five years ago. The one risk I am watching is whether the reinvestment runway is as deep as management claims. If they start doing buybacks at these levels instead of reinvesting in growth that tells you the runway is shorter than advertised. What would make you doubt the compounding thesis?

Every time I look at AMZN I see the same thing. A crowded long with deteriorating fundamentals hiding behind a narrative. Amazon.com Inc. guided down last quarter and the stock went up. That is not a healthy market. That is momentum. And momentum works until it does not. Short interest is low. Borrow is cheap. Nobody is positioned for a downside surprise. That is exactly when surprises hurt the most. I am not saying crash tomorrow. I am saying the risk reward is terrible from here.

I keep asking bull case supporters of AMZN one question and nobody gives me a good answer. What happens when the competition catches up? Amazon.com Inc. has a first mover advantage but advantages erode. Competitors are investing heavily. The moat looks wide today but moats narrow when the prize is big enough. I see at least two well funded competitors making real inroads. In two years the competitive landscape will look different. Is anyone pricing that?

I am going to say something unpopular about AMZN. The institutional consensus on Amazon.com Inc. is bought and paid for. The sell side analysts covering this name have investment banking relationships with the company. Their buy ratings are not independent analysis. They are marketing materials. When you see 90 percent buy ratings on a stock trading at a premium multiple you should ask yourself who benefits from that rating. Follow the money. I am not saying the business is bad. I am saying the analysis you are reading is compromised. Do your own work. Read the 10-K. Read the footnotes. Stop relying on analysts who are paid to tell you to buy.

I spent fifteen years on institutional trading desks before I walked away and I can tell you that the order flow in AMZN does not look like organic demand. Amazon.com Inc. is being accumulated by algorithms and passive flows, not by fundamental buyers making conviction based decisions. When the machines decide to rotate the selling will be just as mechanical. The price action looks strong but the foundation is synthetic. I have seen this pattern before. It does not end well for the retail investors who think they are riding institutional coattails.