Is Amazon a Short After Retail Sales Numbers?

Key Points

• Retail sales came in below estimate
• Amazon's business has been heavily impacted by economic problems
• Half of Amazon's revenue comes from online stores

Not even the holiday shopping season could save November's retail sales numbers, which slumped 0.6% in November from the previous month. That was significantly worse than the 0.2% estimated decline.

These were the softest retail sales numbers since December 2020 on a year-over-year basis.

In fact, nine of the 13 retail categories fell last month, including electronics and furniture.

This decline also includes many price increases since almost every major retailer that reported earnings announced price increases including those from Costco, Target and Walmart that range from 5-15% increases.

As costs remain elevated, the latest data suggests consumers are spending more on essential items like food and grocery all while unit volume is growing slower.

Now with the Fed keeping interest rates "higher for longer," we may not see retail sales recover anytime soon.

So, online retailers are clearly not the screaming "buys" they were during the bull market, but one, in particular, is giving investors a hard time.

Here's what to do about it...

It's Been a Tough Year for Amazon.com

It's no surprise that Amazon.com Inc. (NASDAQ: AMZN) has had some trouble for the past quarters, and that's clearly reflected in its stock price, which is down almost 50% this year.

This is likely all down to the economy.

With rampant inflation, Amazon's e-commerce business is suffering from not only rising product costs but rising expenses. On top of that, consumers have less money to spend, so they can't buy nearly as many products, impacting Amazon's revenue.

These issues are clearly impacting Amazon's retail business, but its Cloud unit, Amazon Web Services (AWS), which could usually be relied on to "pick up the slack" in any retail slowdown, is also getting hit. Amazon discussed on its most recent earnings call that businesses are hitting speed bumps in their growth and scaling back on many of their Cloud expenses.

Amazon is feeling the effects and in the third quarter of 2022, the company's total net sales were only up 15% year over year. This is much lower than earlier years when we saw several quarters of 30%+ growth.

Amazon's operating income came in at $2.5 billion, a decrease of about 48% year over year, with segments even coming in with an operating loss.

So, here's what to do about it...

What to Do About AMZN Stock

While Amazon is a bellwether company, slowing demand has amplified profitability concerns, especially given Amazon's Q4 sales guidance, where the company expected revenues for the period to be between $140 to $148 billion. This is billions lower than the average analyst estimates of $155 billion.

It's valuation also brings some challenges trading at roughly double its sector average for EV/sales at 2.1x and an EV/EBIT that is over 5x the industry average.

Given the current economic outlook and trading at an elevated valuation, it is not a good time to "buy the dips" and build a bigger Amazon stock position.

If you own it, hold it. But aggressive investors might want to cash in on AMZN's big declines by going short; Garrett Baldwin talks about these strategies all the time.

It's possible to outright short-sell AMZN - to borrow the stock on margin and "return" it at a lower price, pocketing the difference - but this can be really risky.

The smarter move is to buy Amazon puts and control hundreds of shares for pennies on the dollar.

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