Amazon short interest hits historical high of $5.3 billion after its recent record rally

Amazon short interest hits historical high
Amazon short interest hits historical high shares have been on an unstoppable run since the beginning of 2015, surging by 170 percent and adding almost $250 billion to the company's stock market value.

And recently, short sellers are showing a record amount of short interest in the stock, according to a report on Thursday from financial analytics firm S3 Partners.

The amount of investor dollars betting that Amazon shares are headed south jumped to $5.3 billion this week, the first time that number has ever eclipsed $5 billion, according to the report. Short selling averaged $2 billion to $3 billion between 2012 and 2015 and topped $4 billion on three occasions since the middle of last year.

Shares of the e-commerce company hit a record high of $844.36 on Oct. 5 and are up nearly 23 percent this year. Bullishness around the stock has been driven by strong performance in the company's Amazon Web Services cloud division, new services launched including a standalone music streaming service to compete with Spotify and Apple Music, as well as plans to hire 120,000 seasonal workers, a 20 percent rise from 2015.

The chart below, from S3 Partners, shows the spike in short interest relative to the increase in Amazon's stock.

S3 Partners said most of the short interest occurred since September with $1.8 billion of new short selling executed in the last six weeks.

"They're seeing an overheated stock," said Ihor Dusaniwsky, head of research at New York-based S3, whose platform is used by hedge funds, prime brokers and mutual funds with $1.6 trillion in assets. "There's serious conviction that Amazon is going to pause and reverse course temporarily coming into the end of the year."

Shorting a stock involves an investor borrowing a security and selling it. If the share price then falls, the investor will buy it back and make a profit. Short interest refers to the amount of short positions that have not been closed.

Betting against Jeff Bezos has rarely been a way to make money.

Already dominant in online commerce, Amazon has won over once skeptical investors by rapidly expanding its high-margin cloud infrastructure unit Amazon Web Services, rolling out popular devices like the voice-controlled Echo and building up its Prime subscription business.

Bull case

Boxes move along a conveyor belt at an Amazon fulfillment center in Tracy, California.
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Many analysts have also continued to raise their expectations. Of those tracked by FactSet, 89 percent recommend buying the stock and four analysts have raised their price targets above $1,000 since late September.

Morgan Stanley, for example, has a price target of $1,100 for the company's shares in its "bull case."

"Amazon shares do not appropriately price Amazon's e-commerce business, which we see as the major driver of profit improvement near-term. In the core e-commerce business, Amazon is entering a phase of improving profitability that we believe is sustainable even as it continues to take a larger share of the global e-commerce pie," Morgan Stanley said in a note earlier this week.

The macro case

For macro investors, there's a more general reason to project an Amazon pullback. Stock indexes are trading near record levels, yet interest rates appear to be on the rise, with current estimates showing two Federal Reserve hikes in 2017. The CBOE Volatility Index, or VIX, spiked this week.

Perhaps that all adds up to a diminished appetite for risk and a move away from top stocks like Amazon.

"Fundamental traders up until now have had the upper hand," said Dusaniwsky. "Now is the chance for technical traders to jump in and see if they can move the stock the other way based on the overbought sentiment in the name."