New Stock Pick: Long Amazon (AMZN) & Short Rackspace (RAX)

By: ispeculatornew
Date posted: 02.13.2012 (5:00 am) | Write a Comment  (1 Comment)

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Last week did not turn out to be a good one for my stock picks, especially for my long position on TripAdvisor (TRIP) which was finally closed on Friday after a brutal day Thursday when the company announced disappointing results. Worst week in some time but I am still up significantly on my picks so far this year so for now I can only look at the lessons learned from that pick and then move on which I am doing today.

Today I am making a play on the clouds and while Amazon is far from a pure “cloud” play, it is a growing business on its end. Let’s start off by looking at the numbers:

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Long Amazon (AMZN)

I have been very reluctant to buy Amazon (AMZN) in recent months despite the fact that I love the company. Why? It has been way too expensive which was properly reflected in my opinion in my 2012 tech stock power rankings. You could say #7 was too high but I believe in AMZN tremendously, especially over the longer term.  The fact though is that after its recent drop (following Q4 earnings), AMZN is better priced and is now trading at comparable P/E ratios to a company like Rackspace (RAX) which makes it a great play in my opinion. Amazon is trading at a smaller forward P/E, has been growing sales more quickly and profits recently took a hit as the company continues to reinvest into its different businesses but I think that is a very smart decision on their part.

FYI – I do not pay as much attention to AMZN’s trend analysis as the huge drop following its latest earnings obviously caused all of the bad momentum

Short Rackspace (RAX)

Rackspace certainly has a great business model but despite the fact that it is a great “cloud computing” play, I think the company is way too expensive. It does have a good place in its industry but it’s easy to forget that it is a fairly competitive, low-margin business and that RAX has not seen profits explode in any way. The recent drop by AMZN following its earnings has finally provided me an opportunity to buy AMZN as RAX has also been priced very expensively in recent months. One downside is that cloud computing continues to be a “hyped up industry” with many new investors getting involved. That could certainly continue.

Disclosure: No positions on Amazon (AMZN) or Rackspace (RAX) but this trade will be opened on Monday morning

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1 Comment

  1. Comment by Intelligent Speculator — February 14, 2012 @ 5:14 am

    I unfortunately missed one detail on this trade, that RAX was announcing earnings that same day… unfortunately, I did not see or I have would have waited since I prefer staying away from those. RAX did announce good earnings but that was not the point. Oh well, will pay better attention next time.

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