Why is this Indian Hedge fund going short on Amazon?

In Mid-June 2016, we called out our position on Amazon. We did short the shares of Amazon based on the signals generated by our Algorithms. Lets understand a few basics of Amazon stock on the bourses. At a price of $844 per share and above, Amazon's market capitalisation is over US $ 400 billion. Compared to Walmart its peer in brick and mortar, its revenues are one-fourth of Walmart (Amazon's revenues also includes the revenues from cloud and other tech infrastructure services apart from ecommerce). While the metrics for valuation of an ecommerce is vaguely different from its peers in brick and mortar space, it is definitely not comparing apples and oranges.

Amazon trades at trailing PE ratio of 210 as compared to Walmart at 14. There is a huge difference in the profits and losses both the companies Amazon and Walmart generate. Next year Amazon will have completed 20 years on its listing on the bourses. Hence it is definitely not a start up.

Our Short of Amazon in June 2016
 

When we had initially shorted Amazon in mid-June 2016, the global ecommerce scenario was a bleak with several mark downs in valuations of several ecommerce companies, not only in the US but closer home with Flipkart, Snapdeal.

While on a flight back from San Francisco, I met up with Kunal and Rohit, the co-founders of Snapdeal in the Eithad Lounge. While their mood down on a different set of reasons which is not relevant for the discussion here, I did discuss on our going short on Amazon and our outlook on ecommerce stocks. Rohit was clear that the they and the ecommerce sector will bounce back within 6 months. He had different set of reasons why the investors will come back to ecommerce. My point for going short on Amazon was completely different. Amazon has come off its peak in mid-June 2016. Amazon has traded above Point C for only 30 minutes in the last 10 days in June 2016. Our justification on calling a sell signal on Amazon was justified as shown below. A Fibonacci Ratio as well on the historical price performance of the stock.

 

Inspire Brexit and other fears, the markets were still on a run and so was Amazon stock in July and August 2016. We had to cover our shorts and the Amazon stock rallied. Post-Brexit, we called for a sharp correction in the markets on 27 July 2016.

While we waited for the markets to correct, in August 2016 all the indices rallied to touch their all-time highs together, a phenomena that was witnessed in 1999, pre dot.com bust. Amazon stock also followed the market trend. When the markets corrected on 9 September 2016, we have once again picked up extremely strong sell signals on Amazon through out September 2016.

 

As the Amazon stock rallied over $847, we triggered a short on Amazon. There is a wide consensus amongst many hedge fund analysts and stock market analysts that the Amazon stock has peaked off.

 

Only time will say how the stock performs. Our Algorithms have proved the market correction of 9 September 2016 correct which we predicted on 27 July 2016. We will continue to gain from the signals our algos are providing us to gain profits for our investors.

Let's wait and watch! We may prove correct on our call on Amazon this time round.

The author is director, EquNev-K1T Capital Hedge Fund, a US equity market-focused Indian hedge fund