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Amazon Down 10%: The real reason why and how to trade it

Amazon (AMZN) shares getting beaten mercilessly this morning. Right now shares are trading about $280 in the pre-market. That's 10% lower than where Amazon closed and would bring year-to-date losses for investors to about 30%.

Wall Street and main street press are doing their best to convince you they know why Amazon keeps blowing up this year. "It's the lack of income! It says right there on USA Today!"At best that's half the story. At worst it's just a dumb way to think about investing on a quarterly basis.

Yes, Amazon lost a huge bundle of money. Net income was a disaster, just as they told us it would be three months ago. But EPS has never been Amazon's focus.

"The Company believes it will incur substantial losses for the foreseeable future... the rate at which such losses will be incurred will increase significantly."

That's from Amazon's S1 dated May 14, 1997. It might be the most honest thing ever written in a government filing.

FILE - In this June 16, 2014 file photo, Amazon CEO Jeff Bezos walks on stage for the launch of the new Amazon Fire Phone, in Seattle. (AP Photo/Ted S. Warren, File)
FILE - In this June 16, 2014 file photo, Amazon CEO Jeff Bezos walks on stage for the launch of the new Amazon Fire Phone, in Seattle. (AP Photo/Ted S. Warren, File)

Investors don't care about EPS because Amazon is an $80 billion discounter growing about 20% per year. They generate about 8.5% cash flow from operations. For the sake of comparison Target (TGT) is about the same size on revenues and is growing at less than 2% with the same cash flows. If you put $100 into Amazon's IPO and shares of Target the day Amazon went public you'd now have $20,400 worth of Amazon and $333 worth of Target. EPS isn't the issue.

There are two huge problems with Amazon as an investment right now. One is that they are a retailer expanding overseas. I've said it before and I'll say it again: For U.S. retailers, going overseas is tantamount to starting a land war in Asia. Every country is Vietnam. Amazon is still growing 25% in North America but only 14% abroad. That's a huge problem made worse by the fact that the biggest area of potential growth is China and that market is obviously rigged in Alibaba's (BABA) favor.

The other issue is that Amazon is too big to get rich kicking the crap out of the likes of Target, let alone Barnes & Noble (BKS) or the late Borders. Amazon's getting its best growth from the cloud. It's competing digitally against Google (GOOGL) and with Apple (AAPL) in hardware and software.

Amazon’s soaring ambitions are coming at a steep cost, dragging the e-commerce giant to its largest quarterly loss in 14 years. Photo: Getty Images
Amazon’s soaring ambitions are coming at a steep cost, dragging the e-commerce giant to its largest quarterly loss in 14 years. Photo: Getty Images

Speaking of Borders, the final nail in its coffin was the Kindle. Amazon invented e-reading. Now Apple is there. What happens when you up the competition from Borders to Apple? You end up with a massive inventory writedown on hardware. That's ok for now, Amazon has the money. It's just that victory can no longer be assumed.

So what do you do with the stock? Off the technicals $280 puts it pretty close to support. My friend Guy Adami has been watching this area for a long time and here we are. As a trade you could do worse than try a long there with a tight stop.

As an investment the stock is probably overvalued but betting on it going to zero is simply foolish. Amazon has always been obsessed with serving its customer. Retailers that focused simply don't go out of business.

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