The holiday season is usually the strongest for retailers, and Amazon (AMZN) is clearly expecting a big rush this year after hiring 120,000 seasonal workers for the fourth quarter, a 20% increase over last year's seasonal hiring. But according to data from Nasdaq, short interest in the company has reached an all-time high of $5.8 billion.
This is the first time short interest in Amazon, a key holding of the Growth Seeker portfolio, has surpassed $5 billion, according to a report from financial analytics firm S3 Partners. Short selling averaged between $2 billion and $3 billion between 2012 and 2015 -- before topping out at $4 billion on three separate occasions since the middle of last year. S3 estimates that the majority of the new short interest has accrued since September, with $1.8 billion being executed in the last six weeks.
In a phone interview Friday, Growth seeker co-manager and Cocktail Investing co-author Chris Versace told Real Money that he believes the reasons for the spike in short interest are threefold:
- The success of the company's stock price compared to the overall market;
- The volatility of the overall market during a shaky earnings season;
- Concerns over the company's ever-expanding operating expenses.
The timing of the spike in short interest coincides with Amazon's stock hitting a new all-time high earlier this month, when shares closed above $800. Despite reporting two quarters of mixed results in 2016, Amazon's stock has risen about 20% this year.
That stock price increase has been well-earned, according to Versace. "If we look at all the data, there is double-digit year-over-year growth in online retail," he says. "And the holiday season will only accelerate that."
On the other hand, Versace does acknowledge that the company's operating expenses are reason for some concern. Amazon expects operating expenses to increase in the fiscal third quarter, continuing the trend of growing operating expenses over at least the previous four quarters.
Amazon has previously said that the increased operating expenses are tied to its efforts to ramp up operation in anticipation of the holiday season -- and its growing spending on digital content. But this may be leading some investors to question whether the company is stretching itself too thin.
Amazon recently launched Amazon Music Unlimited, the company's most-serious foray into the streaming music space, which already features big players like Action Alerts PLUS holding Apple (AAPL) , Spotify, Tidal and Pandora (P) . Add to that the cost of acquiring content for the burgeoning Prime Video catalog and the expenses start to add up.
But Versace sees a silver lining in this, too. The company is spending to expand distribution centers to handle the increased amount of volume it expects to see in the coming months. And even though Amazon spends an inordinate amount on ventures that sometimes do not pan out, it has become more disciplined in selecting and managing new ventures.
The only thing that could place Amazon's ascent in danger is the company surpassing its own internal 3Q operating expense guidance when it reports in two weeks. The stock could take a big hit if that happens, but if it does, that drop would present a buying opportunity for a savvy investor, according to Versace.