For Amazon, The Only Chart That Matters
For all the traders and hedge fund managers who are under 30, Amazon (AMZN) has been here before, and not just once: a place where the company's growth prospects - perceived as virtually boundless - were put into question, leading to a collapse in the soaring stock price.
Indicatively, putting the company's "valuation" in context, AMZN is now trading at a PE of roughly 460x, which compares to 87x during the last peak in the summer of 2008.
But what matters for Amazon has never been earnings: it was always top line growth (the company generated $107 billion in sales in 2015 and less than a billion in net income) and multiple expansion (or contraction).
Putting all that together we get the following chart courtesy of IceFarm Capital: 16 years of sales growth since the first dot com bubble superimposed on top of AMZN's multiple expansion (or contraction). In the latest quarter, worldwide net sales growth once again took a leg lower despite AMZN now employing over a quarter million workers!
But the real question is what will the market do: will it continue giving AMZN's multiple the benefit of the doubt, and let it grow at its recent torrid pace - a pace we have seen many times before - or will the market sniff out that as a result of the global growth slowdown the time to exit has arrived, and lead to an outcome we have also seen many times before, when AMZN's multiple growth suddenly went into reverse sending the stock price plunging as a result.
If the answer is yes, watch out below.
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Those betting on Amazon are 3. The first one believes Amazon has unlimited growth and will engulf the entire market over time. The other is a trend follower who will ride any stock up regardless of fundamental. And the last is those dumb enough to follow banks and analysts who support the stock for their own gain.
Amazon is a great company. It will do well. That is not the issue. However, there is a time when expectations are obviously well overstated. Amazon isn't alone in this camp. Thus making the stock valuation look more reasonable than it would otherwise.
Amazon has risen astronomically and consistently for years thus making chartists and many others feel safe. Just like any constantly upward trending slope, it is easy to take it for granted and assume a measure of safety that isn't there while the downside gets worse and worse. This is especially true with growth stocks because it gets harder to grow with size. Apple is coming face to face with this and Amazon will as well.
Last, most people betting on Amazon are betting on it potentially without even knowing it in their mutual funds etc. Like the previous paragraph, the more dumb, stupid, passive money that is swayed by the sirens constantly saying everything is alright, the less alright the valuation will be. Amazon's valuation is worse because its growth slope is slowing and profitability is nowhere close to supporting the stock price. Those that say its better value because its now profitable are lying to you. To support Amazon's price Amazon needs to grow substantially for decades to come and/or increase margins by a substantial amount. Clearly they lose their edge raising pricing and also kill their growth. Thus leaving with the clear and precise argument that the apple is not as good as the skin makes it out to be. The only good thing is that we know Amazon is far from a bad company. It's just that its prospects are beholden to rational market forces which will eventually bring the price down to real market forces as well.
Hopefully for current shareholders, this will occur after they increase their profitability substantially.