Why Insight is short Ebay and Amazon

Insight believes there are a number of themes sweeping the US stock market that make shorts of Amazon and Ebay attractive. As our post of July 6,2006 brings out, we have concerns about the health of the overall US economy. Within that theme, as money managers gravitate to more defensive stocks, cyclical and consumer dependent companies are more at risk. One of the lessons of the stock market decline of 2000-2003 was that technology companies are indeed cyclical in nature, and not immune to the fortunes of the overall economy. So we think the tech sector as a whole is risky. We also believe that when the market gets "nervous" high PE stocks become increasingly vulnerable, as the market "believes" less in the certainty of future cash flows. PE multiples afterall are only a proxy for the market’s views of a company’s growth prospects. As well, we believe that the declining PE of Microsoft, a bellwether of the tech sector is having important ramifications. Comparable company comparisons are a major way in which companies are valued. As one company becomes more or less valuable, other companies are correspondingly affected. The forward PE of Microsoft is now 16, down from a PE ratio as high as 70 in 2000. This contraction is having reverberating effects throughout the tech sector. With Microsoft at a forward PE of 16, certainly Amazon’s forward PE of 43 becomes less defensible, and even Ebay’s forward PE of 22 is at a large premium to Microsoft’s. We also do believe that as the economy gets tougher, and given low barriers to entry in technology businesses, tech companies hungry for growth will encroach on each other’s domain. We are seeing it with Google v. EBay, in respect to Google’s new payment software. Strategically, we are also far from convinced of the utility of EBay’s acquisition of Skype. We think Skype faces many challenges from competitors, in an area with few barriers to entry. Amazon too faces forays from competitors, and it is a retailer when all is said and done, making it subject to an economic slowdown. In general, we believe Google, with its entrepreneurial culture and intellectual firepower, casts a long shadow over companies like Ebay and Amazon. There is no sector in the online commerce world which is immune from Google’s aspirations.

Philip Frank, PhD
President and Portfolio Manager
 Insight Asset Management LLC
e-mail: insight-asset@earthlink.net