Friday, February 8, 2008

Amazon (AMZN) buyback is noise

Amazon is up 3% after announcing a $1B buyback. That's just ridiculous. Either it's all talk and no action (and thus the pop is silly) or it's a stupid move. Amazon should be using its cash to expand its operations and keep up its growth. We have seen plenty of examples of what happens to your stock price if you miss expectations. Amazon can use its cash to: a) decrease the probability of missing estimates, b) more aggressive acquisitions and technology development, c) buyback its stock. A is a good thing for medium term stock price. B is good for long term stock price. C is good for short term stock price.

Guess which one helps Amazon insiders who want to sell soon before it dips further? The best Amazon shareholders can hope for is that this is solely for insiders to unload some shares and will not actually be executed.

Despite what some market mavens say, Amazon does not actually have the cash to do this. Sure, they have a couple billion in short term assets but they need much of it to cover the $2B in accounts payable. Yes, Amazon can use future earnings to do this but that is hardly 'cash in the bank'. Given Amazon's razor thin margins, it can easily swing from profit to loss. Combine its heavy investment in web services (an unknown sector) and the consumer led recession and I can imagine Amazon posting negative earnings growth.

The best scenario I can come up with: Amazon wants to buyback its shares at the absolute minimum price. It knows that announcing a buyback will boost its stock price which will cause it to pay more for the shares it buys back. So announce it down, before the drop. Wait for it to drop to 15 and then execute the buyback. That's great for owners of the company, probably not so good for management stock options or careers.

In other news: I am currently looking to sell medium term naked puts on high dividend Dow components. I am already heavy on HD so I am going to look to write some puts on JNJ and GE. Probably looking at Jun/Jul puts that are 10% OTM.

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