The more time I spend researching and observing AMZN, the more I”m convinced that it’s the biggest Ponzi scheme in the history of the stock market.
Throughout its 25-year history as a public stock, AMZN has delivered a cumulative total of $1.9 billion in net income to shareholders. Jeff Bezos made $16 billion on AMZN stock in 2014. Here’s the details: Bezos’ Ponzi Scheme
Here’s what’s behind Bezos’ drive to transfer as much money from the stock market to his bank account: Bezos Has Amassed A $59 Billion Fortune – And Wants More. If you read through that article you’ll get a sense of what drives Bezos and how he operates.
Amazon is a Ponzi scheme in the sense that its business model requires sales growth every quarter in order to generate enough cash flowing in to the Company to enable it to pay the cash expenses flowing out of the Company. This is one of the reasons AMZN is constantly running Prime membership 1st-year fee deals. It needs the cash it receives upfront in order to help it fund cash payment expense obligations. The graph to the right shows one of AMZN’s basic problems. AMZN offers free two-day shipping to Prime members. Its cost of shipping eats up an increasing percentage of its sales revenues. AMZN hides a lot of its expenses by making liberal use of the increasingly “grey” areas of GAAP accounting rules. But you would never know this unless you dig deeply into the murky abyss of the footnotes to its financials.
The genius of Bezos is his ability bamboozle big investors and retail chimps into piling into his stock every time he announces another “big” idea. The current massive bubble embedded in the valuation of AMZN’s stock is the $150 billion of AMZN’s $297 billion attributed to AMZN’s cloud computing services business, “AWS.” This is a business that represents about 7% of AMZN’s revenues. That $150 billion is 21-times AWS’ trailing twelve month revenues and about 150-times AWS’ trailing twelve month operating income. Insane valuation multiples.
David Stockman published a piece last week which discusses the degree to which AMZN is an epic stock bubble. However, even he is bamboozled by AMZN’s numbers. He gives AMZN credit for spending $11.6 billion on R&D. This is what Bezos wants the market to believe. Tech companies get a lot of stock market “cred” for showing high R&D “investment.” But the $11.6 billion AMZN spends is not R&D. Market professionals like Stockman are getting this “R&D” number from an expense line item in AMZN’s income statement called “Technology and Content.” They automatically assume that number is R&D’s expense. But it’s not. I like to dig into the bowels of 10Q and 10K filings and kill the market with truth. This is from the footnotes to AMZN’s SEC-filed financials:
Costs to operate our AWS segment are primarily classified as “Technology and content.” Technology infrastructure costs consist of servers, networking equipment, and data center related depreciation, rent, utilities, and payroll expenses. These costs are allocated to segments based on usage. During Q3 2015, we expanded our technology infrastructure principally by increasing our capacity for AWS service offerings globally.
What analysts like Stockman assume to be R&D spending are, in truth, mostly the expense of operating AMZN’s website and its AWS business operations. I detail this in my AMAZON dot CON report. In other words, AMZN is getting $10’s of billions of stock market love based on the idea that it is pouring billions into R&D – R&D that is in reality nothing more than standard operating expenses.
David Stockman and everyone else also use in their analysis the number that AMZN reports as “free cash flow.” But I show in detail, based on using information that is found by digging through the footnotes in AMZN’s SEC-filed financials and by applying a deep understanding of GAAP accounting, that AMZN’s true cash flow is not even remotely close to the number used and reported by analysts and critics in their reports. Again, my report is available here: AMAZON dot CON.
As for the quality of revenues and operating income at AMZN’s cloud business, most of AMZN’s contracts are with Silicon Valley start-ups, most of which will not be around very long. Moreover, the pricing for cloud computing services has undergone extreme price compression from competitive pressures. Here’s an anecdote from a contact of mine who runs a technology-based healthcare company:
Here’s a funny fact on AWS [Amazon Web Services] that again everyone seems to ignore or miss. I have a company and our AWS bill is coming up for renewal and the prices have dropped 90%+ in 3 years. And yet, a hyper deflationary commodity, that is being sold in mass quantity to profit-less start-ups, is worth perhaps $150B or more of AMZN’s market cap. Epic.
Cloud computing services is the contemporary version of fiber-optics. Remember that business, which drove a large portion of the late 1990’s tech bubble? Level-Three Communications (Warren Buffet), Qwest (Phil Anschutz), Global Crossing (A JP Morgan sponsored Ponzi business). The cost of accessing fiber optic networks dropped like a rock as fiber-optic overcapacity and technological advances invaded the business model. The same dynamic has invaded cloud computing.
Global Crossing went bankrupt and reorganized into Level Three; Qwest renamed CenturyLink is a quasi-utility phone/communications company and survived the fallout from the fiber-optic bubble but its then-CEO, Joe Nacchio, was prosecuted for insider trading and financial fraud and spent six years in prison; Level Three still operates but it’s stock, on a split-adjusted basis, dropped from a peak of $1,769 on Jan 31, 2000 to a current price of $53.
These examples show the type of hype, fraud and malfeasance which belie extreme financial bubbles. I am highly confident that the same type of activities are occurring behind the “curtain” at Amazon.
Clearly, from the graph above, the Fed uses AMZN as one of its props to hold up the S&P 500 in order to maintain the illusion that the economy is fine. But at some point, just like with every bubble stock in history, the gravitational pull of fundamentals will engulf AMZN’s stock price and send it plummeting. Perhaps this has already begun: