E Is Amazon The Canary In The Market's Coal Mine?

Here we go again? In November 1999, I titled our newsletter "The Amazon Flows Between a Rock and a Hard Spot." Amazon (NASDAQ:AMZN) had just hit a high of $96.88 (split-adjusted.) Wall Street analysts all raced to the same side of the lifeboat fawning over the brilliance of Jeff Bezos and the unstoppable AMZN, which was going to show a profit "any day now." By March 2001, Amazon was selling for $5.51.

Anyone listening to the Wall Street touts lost 90% of their investment (92.6%, but let’s not quibble.) In January 2000, I recommended shorting or selling Amazon. It was a fortuitous call. Will it happen again? No one can say for certain. Could it happen again? In my opinion — of course it can.

I like Amazon. I am an Amazon Prime subscriber. I love the two-day delivery, especially since I choose to live in a small Lake Tahoe community high in the Sierra Nevada with the nearest real brick-and-mortar stores more than an hour away on a wintertime snow day. I respect Jeff Bezos’ remarkable vision and cold-blooded pursuit of that vision. The idea of slashing expenses by abolishing retail outlets, simple in retrospect, has been revolutionary and crockery-breaking.

But it is not a model that withstands competition forever. The current huge moat Amazon has around itself is these days less about a revolutionary strategic vision than it is a first-mover advantage that allowed AMZN to raise cash by selling bonds below the rate of US Treasuries. As long as the company can use this massive cash hoard to buy competitors, enter newer more profitable businesses, and keep their expenses slashed to the bone, they will remain a dominant, if not particularly profitable, force to be reckoned with.

But at its recent price of $433 (and trailing earnings of minus 88 cents per share), AMZN has an analysts’ combined forward "estimated" PE of 97, zero dividend, a price/book value ratio of 18:1, an equity/asset ratio of 0.22, net margins of –0.4%, and an ROE of –3.84%. If ever there was a company priced for perfection, this is it.

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Disclosure: The author is long ACWDX, AKREX, DRESX, HDPSX, SCHH, DBEF, DTN, ROOF, DFE, SCHG, VONE. The author wrote this article themselves, and it expresses their own opinions. The ...

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Frank J. Williams 2 years ago Member's comment

Nice article Joseph, with some excellent points. I have always found it ironic that Amazon is such a Wall Street darling when the company has such a difficult time actually being profitable. And yes, the stock price is higher than it should be.

But in general, I've been won over. The more I think about it, Amazon is clearly a long term play and so is the company's strategy. For instance, the way they sell Amazon hardware (Kindle e-readers, tablets, phones, Amazon TV Echo etc) so cheap, some say at a loss is at first hard to fathom. But it further absorbs customers into the Amazon ecosystem. They end up buying more digital and even real products.

For instance the new Amazon Dash is so brilliant, I expect it will dramatically increase sales and revenues and is simply put, a smart, innovative product. Amazon is always thinking 10 steps ahead of other companies and that is why Amazon will end up (and stay up) on top.

Clearly I'm bullish on $AMZN, but after taking all the above into consideration, is the stock really so overpriced?

Terry Caruso 2 years ago Member's comment

Very interesting read but I think you glossed over one important fact - that emotion plays into investing. And many will continue to buy up Amazon stock becuase they are very loyal to the brand (very similar to Apple in my opinion).

Amazon has great products, great prices and great customer service. Many of these customers will buy the stock and drive up its prices.

Tiffany Jackson 2 years ago Member's comment

While I'd say this plays a slight role, I think Amazon will appreciate in value because the company is constantly innovating. Bezos has a knack to recognize opportunities before others even realize they are possibilities.

Joe Economy 2 years ago Member's comment

Thanks Joseph, great article. Interestingly, the stock was upgraded in April by three different companies JP Morgan, Raymond James, and Monness. Perhaps insider buying is something to watch for too. In the past 6 months, 54,330 shares were sold with none bought.

Lastly, I was wondering whether Chinese companies like Aliexpress (Alibaba) which provide free global shipping all the time for many products are a threat to Amazon, any thoughts on that?

Joseph Shaefer 2 years ago Author's comment

I expect to see profit-taking by insiders; when I was a senior exec at Schwab I regularly diversified even though Schwab stock was quite "hot" back then. But it would be nice to see at least one insider buy, wouldn't it?!

I'm not knowledgeable enough about Alibaba's offering to know if it poses a serious threat to AMZN -- I only know that, in the aggregate, those threats will continue to mount. Amazon isn't the only company these days with a good-sized cash hoard...

Carol Wydra 2 years ago Contributor's comment

Bezos puts the capital B in blind indifference and Wall street just keeps extending the leash so this bull mastiff can run. Ever walk a mastiff? That beautiful bitch tells YOU where you're going.

A great read,Joseph. You really nailed it. Cheers Carol

Joseph Shaefer 2 years ago Author's comment

Thank you, Carol. With a hoard of cash cheaper than the US Govt had to pay at the time, he can keep dragging the owners along, but sooner or later I believe they will fall flat on their faces. Ouch.