Below, we look at Amazon’s numbers, business model and unique place in market history as the bubble and drunk investing king.
Amazon: The Theme of Our Bubble
Last week Amazon posted it’s “blow out” Q3 earnings which, of course, “beat street expectations.” AMZN, is a kind of poster-child of the mega-cap, new generation of enterprises (from Facebook to Netflix) that continue to fuel this market’s historical rise.
More to the thematic point, AMZN et al continue to titillate the robo machines and momentum traders who, thanks to $3.7T worth of post-08 market “cocaine” (compliments of a Federal Reserve “pusher”) have lost all respect for normal price discovery and valuation common sense.
In short, AMZN is a symbol, an epic symbol, of our times in general and our crazy markets in particular.
So let’s take a deeper look under the hood of this e-commerce/AWS monster-truck and see if there’s any power in its much-headlined engine. As important, let’s discuss how this stock represents all that is wrong in the “New Normal” of a Fed-driven securities market.
(But first, let me give kudo’s to David Stockman, from whom much of the balance-sheet data discussed below is derived. Before heading off to a fancy-lad prep school out east, I played baseball and football on the fields of Lakeshore High school, whose stadiums are named after his family. In short, this third-baseman from Michigan has a lot of respect for David Stockman.)
Amazon: The Numbers
Numbers matter. Balance sheets matter. Or at least, they used to. Amazon’s current market price and valuation distortion is evidence enough that such fundamentals don’t seem to matter today.
The Q3 earnings last week came in at $316M; share increases came in at $0.53 per share, “crushing” the $0.02 per share analyst expectations and thus giving rise last Friday to a price boost that sent Amazon’s market cap up by $60B in a single day.
Whwwwww. That’s more market cap growth in 24 hours than the entire market cap of General Motors in nearly a century.
What the MSFM spin-doctors and bull-makers didn’t report, however, was that just three months prior, the earnings expectation for AMZN was $1.91 per share, not $0.02 per share.
This is a dirty little secret of Wall Street illusion: sell-side analysts, worried about a correction, set expectations lower so that earnings always appear stronger.
This is a lot like taking junior’s C- report card and declaring victory: “Johnny beat our expectations, we expected D’s and he pulled off a brilliant C-!” In short, pure nonsense.
Furthermore, and as David Stockman reminds us, such deliberate downward “guidance” by the street is a flagrant violation of the honest reporting and “Fair Disclosure” rules which our essentially useless SEC is supposed to uphold.
Equally absent from the media cheerleaders and sell-side illusion peddlers was the fact that Amazon’s quarterly numbers dropped by 37% from last year’s Q3 report…
Also absent were a few other sobering facts, viz. that: 1) Amazon’s LTM net income ($1.9B) has gone down by 15% from the prior year’s LTM figure ($3.6B); 2) its FCF was negative $4B, and 3) its profit margin limps at 1.9% as a whole, and is negative when one takes away it’s AWS revenues.
Meanwhile, AMZN’s Q3 market cap chimes in at $535B, having grown by $400B in just under three years.
So how does a company with declining net income, negative FCF, and razor-thin (to negative) profit margins explain a $400B jump in market cap, $1,100 share prices and a PE multiple of 280X?
Easy: This is what happens when momentum drunk markets trade on $3.7T of market stimulus (QE and low rates) compliments of a delusional central bank. The intoxicated trading has focused particularly on headline-making tech stories like Amazon, Netflix, Facebook and Tesla.
This kind of drunken speculation, by the way, is a telltale sign of a peak that precedes the “popping” phase of a market bubble—of which we all remember: think of the dramatic price dives suffered by Juniper, CISCO, Microsoft, Yahoo, Global Crossing et al in prior bubbles…
So here we have AMZN, a nearly profitless company trading at all-time highs despite the balance-sheet driven (and ignored) fact that it’s all “hat and no cowboy.”
A Broke Business Model
So just what does Amazon do? Well, primarily it sources, stores and distributes stuff for online customers. It has been the destroyer of brick and mortar retailers, which are now joining the ecommerce wave while desperately learning to swim.
More bluntly, Amazon’s model makes it a veritable “pack-man” which roams the earth seeking out, underpricing, destroying, and then gobbling up every sector it enters, from books, tooth paste, diapers, and pharmacies to grocery stores.
It may seem like fair competition or good ol’ fashioned capitalism and “creative destruction,” but because AMZN is itself a profitless and grossly over-valued monster, the destruction is neither creative nor capitalist, it’s just, well: destructive… Drunk Investing at its finest.
That is: were it not for the absurd stock valuation of this Fed/Momentum-driven poster-child of intoxicated market distortion, AMZN would not have the cash or cache to underprice and destroy every industry it acquires and in which it then continues to lose money.
This may seem like invective or rant or opinion. But look deeper: the numbers don’t rant, they just report.
Apologists for Amazon’s nosebleed valuations recognize some of the short-comings of its ecommerce profits, but point instead at the success of its cloud services, from which the bulk of AMZN’s relatively thin profits are derived.
But don’t think for one minute that tomorrow is like today or that AMZN owns the cloud. As I’ve written elsewhere, the financial Darwinists who run Oracle, Microsoft and Google are hardly sitting by and idly watching Amazon win the AWS game. Instead, they are going in guns-blazing to capture the cloud’s market share, with Larry Ellison, leading the charge.
We’re not suggesting Amazon is a joke, or that its disruptive innovator, Bezos, has not built something solid. What we are saying is that AMZN is grotesquely over-valued. Period.
And this is what makes Amazon a symbol of its times, for it is not alone in the delusional place it holds in the minds of machines and men who pay 200+ PE multiples for companies trading on empty hype rather than real hay.
This is what happens when Fed steroids distort markets into meth labs of unhealthy highs rather than sober pricing.
Of course, the hang-over and de-tox will come for AMZN and many other over-valued securities. Our signals are watching them patiently. Frankly, and no matter how long it takes, we can’t wait to short AMZN…
One response to “Amazon —The Symbol of Drunk Investing”
November 03 2017