OK, so if you are trying to use traditional valuation analysis on Amazon.com, Inc. (NASDAQ: AMZN) you are probably pulling your hair out.  After all, isn’t 189-times this year’s expected earnings a bit high in these uncertain times? What is so amazing is that the short interest has been declining even as the company’s story should be maturing.  The mid-June short interest showed a short interest of 8.019 million shares and that was the fourth consecutive drop and it was the lowest short interest since the end of January. One analyst call stands out today from Canaccord Genuity.

The firm’s Michael Graham has only maintained a HOLD rating and it gave a price target of $230.00 as the level it still sees.  Usually we would not cover a HOLD rating but this is something that traders and investors need to pay attention for all of these nosebleed valuation stocks that just don’t make valuation sense on the surface.

Graham said that Amazon is still spending, but said the metamorphosis continues while profits are non-existent. He noted, “Today’s shareholders continue to foot the bill for tomorrow’s Amazon, the world’s largest (and possibly only) distribution and fulfillment network for physical goods (sold by others), digital media, and bits of information. Ok, so they probably won’t win the digital media fight outright, but they are looking pretty good on the other two.

The firm noted two positives: 1) net shipping costs as a percent of revenue declined sequentially for the second quarter in a row. 2) Management indicated that it does not view same-day delivery as economically viable on a broad scale.

Here is where the news gets real interesting.  The firm’s report uses a valuation metric of 25-times earnings.  The problem is that the 25-times earnings multiple is based upon Canaccord’s 2015 non-GAAP earnings estimate of $13.84 per share discounted to the present.

Amazon shares are now up over 5% at $232.00, but the reality is that using traditional metrics to evaluate Jeff Bezos and friends has just so far not worked.  Amazon has sent more short sellers to the poor house over the years than can easily be counted.

Still, it is 2012 now.  We can get comfortable using 2013 estimates in some cases now for established businesses.  Maybe we could stretch to 2014.  But trying to use 2015 estimates at this point is a stretch beyond anything we are comfortable with.  With a recession in Europe and a slowdown in China and the BRIC nations meeting the coming fiscal cliff in the United States, how can we trust estimates out to 2015.  You could just as easily make the argument that Amazon will earn $25 per share in 2015 as you could that they will only make $5.00 per share.

JON C. OGG

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