Tag Archives: Jeff Bezos

The Truth Behind Amazon’s Reported Earnings

This article below is from my Seeking Alpha post earlier this week.  I’ve studied AMZN’s financials and business model for several years. I’m probably one of the few analysts who bothers to scour the footnotes of AMZN’s financials. I was taught by the best at University of Chicago to start with the footnotes and work “up” when pulling apart GAAP financial statements.  I can say with 100% certainty that the “Free Cash Flow” that Jeff Bezos promotes with ardent zeal is a fictional number, if not fraud.  The SEC looks the other way.  Suffice it to say that AMZN’s true trailing twelve month free cash flow  based on strict GAAP is nearly negative $4 billion. I demonstrate this below.

Amazon Perfects the “Beat the Street” Game – Amazon (AMZN) reported 52 cents per share “earnings” on October 26th vs. the consensus 2 cent estimate after the market closed. The stock soared 7.8% after hours as hedge fund algos and retail daytraders chased the stock higher on the headline report. AMZN “walked” Street analysts’ estimates down to a number that was easy to “beat.” Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. cents. By the time AMZN was about to report, the consensus estimate was two cents. This is how the game is played.

The graphic below from Yahoo Finance shows a 3-month timeline of this “walk-down” process for AMZN’s consensus earnings forecast for Q4 2017, Q1 2018 and the full-year 2017. The current estimates were again revised after the Company’s Q3 report (source: Yahoo.com/finance w/my edits):

Make no mistake: the company knowingly “guides” analysts down in order to engineer a “headline” surprise. The “beat the numbers” game is one of the many games connected with corporate earnings reports. That said, AMZN’s actual EPS in Q3 2017 was the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting is heavily at play here. Acquisition accounting enables a company to boost revenues and hide expenses.

[Note: All numbers are taken directly from AMZN’s Third Quarter 10-Q]

Here’s a fact that Wall Street or Bubblevision won’t report: in Q3 2016, AMZN’s GAAP tax rate was 47% vs 18% in Q3 2017. Anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation. If AMZN had simply used a constant GAAP tax rate in Q3, its net income in Q3 would have declined to $200 million this year from $252 million in Q3 last year (remember these are GAAP earnings, not actual cash earnings). On this basis, AMZN’s EPS would have shown a drop from 53 cents last year to 41 cents this year. Anyone paying the current price of AMZN at a PE of 290 is likely ignorant of the fact that AMZN’s operating income is declining and its debt outstanding is increasing.

AMZN’s operating income plunged yr/yr for Q3 by $228 million, or nearly 40%. Operating income in its North American e-commerce business plunged $143 million, or 56%. AMZN’s e-commerce business lost $824 million on an operating business in Q3 (see p. 26 from the 10-Q linked above). YTD AMZN’s e-commerce business has lost nearly $1 billion). It likely would have been worse without Whole Foods numbers in mix. This is because, when AMZN acquired WFM, WFM’s operating margin was 4%. AMZN’s has been running near zero – it was 0.7% in Q3. Acquisition accounting, among other things, allows AMZN to present its numbers “as if,” meaning “as if” AMZN owned WFM since AMZN’s inception.

One of the primary reasons that AMZN’s operating margins decline continuously is the cost of fulfillment. “Fulfillment” is the cost of getting a product from the warehouse to the customer’s doorstep. In Q3 2016, AMZN’s fulfillment costs were 19.4% of product sales. By Q3 2017, it had jumped to 22.3%. Fulfillment is a cornerstone of AMZN’s e-commerce model. Offering free shipping to Prime members is a guaranteed money-loser.

In general and on average, AMZN loses money on every e-commerce sale. AMZN’s e-commerce/consumer products operating margin will continue to decline because the Company is implementing an aggressive price-cut program at Whole Foods. This will drive the WFM business margins toward zero.

AMZN’s only source of operating income is the AWS (cloud services) business. The revenue growth rate from 2016 to 2017 for Q3 was 41%. This is down from the 55% growth rate that occurred year over year from Q3 2015 to Q3 2016. Part of this is a function of “scale.” As the business grows in overall size, the growth rate will tend to decline mathematically. But the AWS revenues are just 10% of AMZN’s total revenues.

Furthermore, AMZN’s AWS business is now under heavy attack. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Cisco (CSCO) announced that they are teaming up to go after AWS’ cloud territory. More ominously for Amazon, Microsoft (MSFT) is quickly moving into and taking away AMZN’s market share in the commercial cloud space. Based on its FY Q1 numbers released Thursday, MSFT’s commercial cloud revenue annualized now exceeds AMZN’s AWS revenues annualized. AMZN historically has held the largest market share in cloud computing services. Given the new competition from dedicated tech companies, the profitability and growth of AMZN’s AWS business segment is at risk.

AMZN’s deceptive presentation of free cash flow – Every quarter AMZN presents an earnings slideshow, the first slide of which prominently shows trailing twelve month free cash flow. But this presentation of FCF is highly deceptive. On the first slide, AMZN shows its latest trailing twelve month FCF to be $8.050 billion. But that is a cherry-picked, non-GAAP derivation of actual free cash flow. Here’s AMZN’s actual GAAP FCF as derived from its Q3 10-Q (source: AMZN 10-Q, with my edits):

Free cash flow is technically defined as operating cash flow less capex expenditures and debt payments, the latter of which is negligible for AMZN – for now. Note the difference claimed to be $8.050 billion in “free cash flow” by Jeff Bezos and the negative $3.969 bullion actual GAAP FCF. Here’s the deal. Jeff Bezos conveniently omits the amount of cash AMZN spends to acquire property and equipment using capital leases and build-to-suit leases. To the extent that these expenditures are non-recurring, that presentation of FCF is valid. However, not only are AMZN’s expenditures under capital leases serially recursive, the payments increase every quarter and have been for several years. In 2014 AMZN’s full year cap lease expenditures was $4.9 billion. Thru Q3 2017, AMZN’s trailing twelve-month expenditure was $12 billion.

Furthermore, a “build-to-suit” property is built specifically for AMZN’s purposes. It likely is not easily sold re-leased for a next best use. Because of this, the lease functions as debt used to fund this capex. As such, the payments under build-to-suit leases should be treated as capex and not excluded from the derivation of free cash flow. Again, it’s an accounting sleight-of-hand employed by Bezos for the purposes of deception.

The use of capital leases to manipulate financials is not uncommon. However AMZN intentionally uses this financing techniques as mechanism to manipulate its numbers. Among other superficial accounting “benefits,” using capital leases rather than debt to fund expenditures enables keeps the appearance of debt off the balance sheet. It also allows AMZN to keep the cash used to fund capital leases out of the “Financing Activities” section of AMZN’s Statement of Cash Flows. AMZN is required to disclose the amount spent on cap leases, which it accomplishes in the footnotes. Very few analysts or investors bother to read the footnotes.

AMZN’s debt load – AMZN used $16 billion in near-junk bond rated debt to finance the Whole Foods acquisition. Its long term debt is now $24.7 billion. At the end of 2007, its long term debt was $1.2 billion. AMZN’s debt-load has grown by over 20x. However, at the end of Q3 2017, AMZN also had $18.8 billion in “other long-term liabilities.” This is almost entirely the capitalized leases used to fund property and equipment acquisitions. At the end of 2007, this number was $292 million. Use of cap leases has grown by a factor of 64x. Now, imagine if AMZN were forced by GAAP to include cap leases as part of its long term debt – not an unreasonable standard in this case. AMZN’s debt load would be $43.5 billion – nearly double the current disclosed level of debt.

See how this works? If AMZN were forced to consolidate cap leases into “long term debt,” its recent $16 billion bond deal would have been rated as non-investment grade – aka junk. The average cost of the $16 billion issued is 3.56%. If AMZN had been rated junk, it would have raised the cost of this deal by at least 100 basis points (1%) and likely more. Assuming an added cost of 1%, this would have added $160 million in interest expense. It might look like a smart move for Bezos to exploit GAAP accounting like this but it serves to pull the wool over the eyes of the investors who bought the bonds. This is because the true credit quality and ability to service the debt is significantly lower than that assumed by these investors.

The point here is that every facet of AMZN’s financials is highly misleading. AMZN is not what it appears to be. Yes, the stock has done remarkably well considering the ugly nature of the underlying truths. Note that AMZN did have a brush with insolvency in 2003-2004, but Warren Buffet bailed out AMZN by loading up on junk bonds Amazon had outstanding at the time. This was a temporary stay of execution that was followed up with the rapid inflation of the mid-2000’s credit and stock bubble, which enabled AMZN to refinance the junk bonds Buffet had bought. This gave AMZN plenty of cash to keep spending money to generate sales. AMZN also was bailed out by the bond market a couple years ago, as it issued $3 billion in debt in 2012 and $5 billion of debt in 2014. If AMZN is truly generating free cash flow, why does it continuously have to issue debt to fund its operations?

Amazon has thus been given a free pass by the financial markets for most of its existence. Make no mistake, AMZN can do this only for as long as market bubbles inflate. If the current credit/stock bubble is in the process of deflating or has popped when it comes time for AMZN to start paying down its heavy debt load, including the capital leases, it’s highly likely that the market won’t enable AMZN to continue kicking the can down the road by refinancing the debt payments. AMZN clearly does not generate free cash flow that can be used to make the debt payment obligations. Thus, in this scenario, there’s a strong probability that AMZN would hit the wall, inconceivable as that may seem right now.

AMZN’s stock has had a remarkable run this year in defiance of the true underlying fundamentals (click to enlarge):

Amazon is a difficult stock to short because of its correlation with the overall stock market. However I’ve been able to scalp profits on an intra-day basis using near-money weekly puts. Anyone who is willing to manage a short position on a daily basis will eventually be rewarded. When AMZN surprised the market by missing its Q2 earnings, the stock sold off $140 from top to bottom over 2 months. If AMZN misses Q4 earnings the stock could, minimally, fill the gap in the graph above ($980) – a $160 decline using the closing price on November 21st.

If you are interested in short-sell ideas like AMZN, please visit this link:  Short Seller’s Journal, where I offer a weekly newsletter that focuses on shorting the stock market.

As A Dog Returns To Its Vomit, Stock Jockeys Return To The Ponzi Stocks

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. – Sir John Templeton

I’ve always admired John Templeton. Not as the “father” of the modern mutual fund but because I considered him to have been one of the most intelligent thinkers in at least my lifetime (55 years). In 2003 he gave an interview from his retirement “perch” in the Bahamas to one of the financial media organizations. He stated at the time that he would not invest in the U.S. housing market until “home prices go down to one-tenth of the highest price homeowners paid.” Imagine what he would say today…

“As a dog returneth to his vomit, so a fool returneth to his folly” (Proverbs 26:11). That proverb is particularly applicable to today’s “everything bubble,” especially stocks and housing. The current en vogue is to compare today’s market to 1987, when the Dow crashed 22.5% in one day. Honestly, I don’t think it matters whether you use 1929, 1987,
2000 or 2007. By just about any conceivable financial metric, the current stock market is the most overvalued, and thereby the most dangerous, in U.S. history. The other “vomit” to which analysts “returneth” are the attempts to explain why today’s extreme valuations are “different” from the extreme overvaluations at previous pre-crash market tops. I find the “interest rates are record lows now” to be the most amusing.

On Friday, the momentum-chasing hedge funds and retail daytraders couldn’t get enough of the FAANGs (FB, AMZN, AAPL, NFLX, GOOG) + MSFT. AMZN’s stock ran up $128, or 13.2%, which was still less than AMZN’s biggest one-day percentage jump of 26.8% on October 23, 2009.  AMZN’s stock price has been highly correlated with  amount of money printed by the “G3” (U.S./Japan /EU) Central Bank money printing machine.  But since July, AMZN’s stock began to diverge negatively from the growth path of G3 money supply. The FANGs in general had been losing steam starting in June. AMZN was particularly weak after it reported that big loss in July. It took one absurd headline “beat” for AMZN to “catch back up” into correlation with the growth line of G3 money printing (FYI, the Fed’s balance increase slightly in October, despite the announcement that it would be reduced by at least $10 billion in October).

The stock market will head south quickly sooner or later. The “curtain” is being “pulled back”on stock Ponzi schemes one by one. The truths about Tesla (TSLA) are beginning to emerge in public finally. Eventually the stock market will take a hard look behind the Amazon (AMZN) curtain. Ponzi schemes can flourish during periods of bubble inflation. But when bubbles deflate, Ponzi schemes fail. It’s no coincidence that Bernie Madoff’s Ponzi scheme fell apart in late 2008 (he admitted guilt in December 2008). It began to become unmanageable during 2007, when the stock market started to head south. Eventually it will become impossible to cover up fundamental facts from the investing public. Fundamental facts about the economy, corporate earnings and the financial system. That’s when the rush toward the exits will commence.

The above commentary/analysis is from the latest issue of the Short Seller’s Journal. In that issue I review AMZN’s Q3 financials in-depth. This includes excerpts from the SEC-filed 10-Q used to demonstrate why Jeff Bezos’ LTM “Free Cash Flow” of $8.05 billion is a Ponzi number and the true GAAP Free Cash Flow is -$3.9 billion. AMZN is a cash-burning furnace and I prove it. To find out more about this and other ideas for shorting this bloated stock market, click here: Short Seller’s Journal information.

Amazon: The Devil Is In The Details

Jeff Bezos/Amazon is the poster-child for the degree to which this entire economic and political system is profoundly corrupt. – Investment Research Dynamics

Amazon stock made a big after-hours “shock and awe” move after it reported a huge headline “beat” of its Q3 earnings.  It’s a funny thing how the “beat the Street” game works.  Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. The estimates were systematically “walked down” over the last 3 months to a mean estimate of 2 cents and a high-end estimate of 26 cents. This is how the game is played.

Make no mistake, the Company knowingly “guides” analysts down in order to engineer a “headline” surprise. This is how absurd this game has become. The “beat the numbers” game is one of the many frauds connected with corporate earnings reports. That said, AMZN’s EPS in Q3 2017 were the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting manipulation is heavily at play here.  Acquisition accounting enables a company to boost revenues and hide expenses.

Here’s just a cursory look at the “Devil in the details” (Short Seller Journal subscribers will get the in-depth, eye-opening analysis in the next issue released Sunday afternoon).

Amazon’s headline revenue “growth” cost AMZN a lot money in terms of operating earnings.  Despite the “marquee” 34% sales “growth” rate, AMZN’s operating income plunged nearly 40% year/year for Q3.  This drop in operating income has accelerated, as YTD for the first 9 months of 2017, AMZN’s operating income has dropped 32%.

This should have been the quarter that AMZN literally “printed” GAAP income because the quarter included its highly touted “Prime Day” record sales.  Furthermore, AMZN should have been able to reap the benefits of merger/acquisition accounting from its Whole Foods acquisition.  M&A GAAP standards enable companies literally to manufacturer GAAP accounting profits.   I would suggest that Bezos’ price-cut strategy at Whole Foods has driven WFM’s operating margin toward zero (from 4% pre-acquisition) – like the rest of Bezos’ consumer sales businesses.  But there’s more…

AMZN’s GAAP net income showed no growth – literally in Q3.  In 2016 AMZN reported $252 million in net income for Q3.  In 2017 it reported $256 million.  EPS were flat at 53 cents (basic).  Zero growth.  For this, AMZN’s market cap after hours increased by $37 billion.  But there’s more…

Without going into the monotony of GAAP tax rate accounting, suffice it to say that anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation.  Again, the Devil is in the details…

In Q3 2016, AMZN used a 47% GAAP tax rate.  This latest quarter, AMZN capriciously applied an 18% GAAP tax rate.  Had AMZN maintained the same GAAP tax rate used last year, its net income in Q3 2017 would have declined to $200 million, or 41 cents/share. For this, the last buyer after hours ($1,047) was willing to pay 266x trailing twelve month earnings.

This is just the beginning of an in-depth look at the rotting condition of the numbers buried in AMZN’s financial statements.  The next issue of the Short Seller’s Journal will pull back the curtain on areas of AMZN’s SEC-filed numbers where no Wall Street analyst or financial media cheerleader would ever dare venture.  AMZN’s cash flow is declining – and its true free cash flow – not the Bezos non-GAAP “free cash flow” – is negative.  I can prove it.

The highly-touted acquisition of Whole Foods could turn out to be Jeff Bezos’ “Wings of Icarus.”  He may have flown too close to the sun on this one.

The information I present in the Short Seller’s Journal is actionable.  The last two times AMZN’s stock shot up I put a short recommendation on AMZN’s stock (including put option ideas) which led to profitable short-covering opportunities.  In the last issue I advised waiting until after Q3 earnings, stating that a big gap-up in after-hours would lead to another opportunity to short the stock.  You can find out more about the Short Seller’s Journal here:  Subscriber Information link.

Netflix And Amazon: Case Studies In Accounting Games

Over the time since I started the Short Seller’s Journal, several subscribers have asked about Netflix (NFLX). For some reason I have refrained from presenting it as a short idea, instead choosing AMZN and TSLA as my insanely overvalued “tech poison” short-sell ideas. However, knowing that NFLX was reporting this week, I decided what if – and really more like when – it spiked up on a headline “beat,” I would take a close look at the numbers to see what’s going on with NFLX accounting. Sifting through NFLX’s web of accounting chicanery took a lot longer than I anticipated…

As I expected, I found a company that pushes the envelope in an area of GAAP accounting in which there is substantial “grey” area that enables companies like NFLX to manufacture and manage reported GAAP net income. But NFLX bleeds cash, as I’ll show. The quote at the top summarizes the NFLX business model: it will burn cash “for many years.”

In a sense, NFLX is similar to a Ponzi scheme. As long as cash received in the form of revenues and stock or bond financing exceeds cash expense outflows each year, it can continue operating. But as soon as revenues decline or the capital markets refuse to give NFLX money, it will collapse. As you will see below, while NFLX is generating growth in its net income, the amount of cash burned by its operations has been increasing dramatically. And it has been financing this cash flow deficit with debt.

The above narrative is from last week’s Short Seller’s Journal. I walked through the areas in which NFLX exploits grey areas in GAAP accounting rules to manipulate the cash flows from its business model (cash revenues minus actual cash expenses) in order present GAAP net income. The primary lever it uses is the guidelines (note: “guidelines” – not “rules”) for depreciating media capex. I show step-by-step how NFLX exploited the grey areas in GAAP to manufacture the $0.15 earnings per share it reported.

I also discussed strategies for shorting NFLX, which included shorting the stock outright and using puts. Subscribers who shorted NFLX on Monday morning this past week are green on their short positions. I also suggested capital management strategies.

This week I will be showing how to dissect the numbers AMZN must disclose in the footnotes to its 10-Q filing to see what’s really going on beneath the Jeff Bezos show. For instance Bezos opens his earnings presentation every quarter with a slide and a discussion of the “Free Cash Flow” produced my AMZN on an LTM basis. It’s the very first slide in the earnings call slide show. He’s now claiming LTM FCF of $9.7 billion.

BUT in the footnotes to the 10-Q – a place where no Wall Street analyst ever dares to venture, assuming they even know the footnotes exist – there’s a disclosure that explains that Jeff Bezos FCF is not GAAP FCF. Using GAAP, the Bezos FCF is reduced to $4.1 billion. I’m using ETIDA minus Capex minus Capital Lease Amortization payments. I even give him the benefit of adding back the non-cash share compensation portion of salary, which technically is not allowed in GAAP because share dilution is a form of cash use ultimately from the shareholders perspective. The $4.1 billion is GAAP free cash flow, not the Bezos bullshit FCF.

And not only that, but the AMZN core business model is starting to break down. But that analysis will be saved for this week’s Short Seller’s Journal.   Subscribers to the SSJ also get 50% off a subscription to the Mining Stock Journal.   Click here to learn more about the SSJ:   Short Seller’s Journal info.

Dave, just a moment for some feed back. I just placed and order for 1 oz gold eagles thanks to my profits off Tesla and BBBY. Thanks, as always. – Subscriber email received in early July

Amazon Prime Day! What Does This Mean?

Amazon stock is up $6 in pre-market trading because it’s…”Prime Day!”  But what does this really mean?  It means AMZN will burn more cash selling and fulfilling commodity products with free 2-day shipping. But it will likely get another $20 pop in its stock because “Prime Day” revenues today will grow X% over 2016’s “Prime Day.”

Am I the only person in the world who has figured out that AMZN’s e-commerce operating income margin is nearly zero?  Does anyone besides me know that AMZN’s non-North American e-commerce business loses money on an operating basis?  The numbers are posted in its 10-Q every quarter.   North America and ROW combined last quarter AMZN’s e-commerce business did a whopping 0.3% operating margin.  At least that’s 0.3 higher than Blutarsky’s grade point average in “Animal House.”  Short Seller’s Journal subscribers know this because I show them the numbers –  Wall Street’s institutional investor clients do not know this because these market “professionals” can’t be bothered with doing actual research).

AMZN has already been crowned as the new “grocery killer” by the Jim Cramers of the world.  It’s amazing that he can make this assertion without having ever looked at AMZN’s real numbers.  In fitting irony, the opposite of Cramer’s assertion is the truth based on real world numbers.  Walmart, Target, Bed Bath etc have 3-5% operating margins that they can “play” with to attack AMZN’s e-commerce model.

Is AMZN “killing” brick-n-mortar or are the healthy brick-n-mortars going after AMZN’s e-commerce business?

Go onto Walmart’s website.  It’s now offering 2-day free shipping on millions of SKU’s without any requirement to pay money up front to join a “club.”  I was wondering by Bezos decided to offer low-income people a big discount on Prime memberships.  He knew Walmart was going to offer 2-day free shipping to that retail demographic without a “club membership” requirement.  Guess what Jeff?  WMT can afford to ship for free.  Your company cannot.  It doesn’t cost much extra for WMT to offer 2-day shipping because it can fulfill most orders from store inventory in the same county or city or neighborhood from which the order was placed.  AMZN can not do that.

Walmart is more than 3x the size of AMZN and it is many times more profitable.  BBBY’s e-commerce business last quarter grew 20% year over year.   I got news for  Cramer and all the robotic Wall St. analysts, and the lemmings who slavishly worship both:   Walmart, Best Buy,  BBBY and TGT have room to subsidize sales even more and still operate profitably.  AMZN does not.  If you don’t believe me then look at the SEC-filed number yourself.

Stay tuned…there’s more…two major category-killer discount grocery chains from Europe are expanding aggressively in the United States and Microsoft is cutting back on certain of its operations to focus on its cloud enterprise business.  AMZN’s AWS business will be attacked aggressively by MSFT, ORCL, GOOG and IBM.  The price of cloud computing will eventually approach zero.  Did anyone out there realize that AMZN’s cloud margins decline every quarter?

Happy Amazon Prime Day!  AMZN will lose money on just about every item sold today.  I guess that’s a great reason to celebrate…

The Fake News Witch Hunt: McCarthy’s Red Scare Redux

“Good night and good luck.” – Edward R. Murrow

The Washington Post – I should say, Jeff Bezos’ Washington Post – ran an article last week which featured a report from an organization called “PropOrNot” which claims it used “a combination of manual and automated analysis…in order to identify (“red flag”) [actual quote from the site, verbatim] the following as Russian propaganda outlets.”

Hmmm…”red flag” as in, “Red Scare?”  In what is a bona fide rebirth of McCarthyism, PropOrNot claims to be “an independent team of concerned American citizens with a wide range of backgrounds and expertise” that is currently “volunteering time and skills to identify propaganda – particularly Russian propaganda…”

Seriously, is this some kind of joke?  Is this the same group of “professionals” who devise the “seasonal adjustments” used to brew up Government economic reports?   Has anyone vetted this organization?  Apparently Jeff Bezos is unable to answer any of those questions or, as a responsible purveyor of “independent” journalism he would have dispelled these questions by disclosing the credibility of this group up front.

You’ll note that I specifically single out Jeff Bezos.   Bezos was quietly appointed by the Secretary of Defense to the Defense Innovation Advisory Board in July.    The Board was formed in March 2016 to “focus on new technologies and organizational behavior and culture.”  The Board has been asked to  “identify innovative private-sector practices and technological solutions that the DoD could employ in the future.”

Clearly this is straight out of Orwell’s playbook.  It has behavioral modification and thought control seeping from every pore.  It is a Deep State operation and Jeff Bezos is now part of the Deep State fabric.

This is Orwell’s Thought Police.    The new “advisory board” is headed up by Google’s Eric Schmidt.  Recall that right after the primaries if you typed “Presidential election” in a Google search bar the first item that popped up was picture of Hillary Clinton standing in front of the Presidential seal.   It was eventually removed.

This blog was listed as one of the 200 websites that “reliably echo Russian propaganda.” I’m quite honored to be listed among many of the well-respected sites on “the list.”   Several readers emailed me to say that “you must doing something right” to be included on that ridiculously absurd “Red Scare” list.

The two gentlemen who should be most offended are David Stockman and Dr. Paul Craig Roberts,  both of whom stick out prominently on the list.  Stockman and Dr. Roberts are former high-level Government officials.  Both were, among a long list of prestigious and patriotic accomplishments, members of Reagan’s Cabinet.  The accusation that they are conduits for Russian “fake news” is not only absurdly idiotic, it’s libelous terrorism.

This development is yet another move down that slippery-slope to Totalitarianism on which the United States Government is sliding.  In the 1950’s a Senator named Joseph McCarthy implemented a raging Congressional witch-hunt for “communists.”  The inquisition featured more than a month of televised hearings that began looking for communists in Government.  For over two years McCarthy was allowed to conduct inquisitions which extended beyond Washington DC and which eventually pointed the finger at prominent writers and famous Hollywood personalities.  He singularly destroyed highly successful people in all areas of society.   It was an absolute tragedy and a complete disgrace to this country.

Fortunately, Edward R. Murrow featured a report that undermined McCarthy’s Red Scare witch hunt.  McCarty was eventually censored by the Senate and, even more fortunately, died in 1957.

Unfortunately, American journalism no longer has the likes of an Edward R. Murrow – or even Woodward and Bernstein.  Corporatism and the Deep State has succeeded in eradicating unbiased and truthful mainstream journalism.   The Alternative Media – like the sites featured on the PropOrNot Red Scare list – represent a bona fide attempt to present the truth to the public.

I predict this PropOrNot movement, sponsored by the likes of Jeff Bezos and Eric Schmidt, is going to succeed in shutting down the one ray of hope left for this country.   Jeff Bezos’ Washington Post has taken the lead in this modern version of a McCarthyism “witch hunt” and the WashPo exemplifies the amount of political power and wealth being directed at suffocating the truth.   It is Orwell’s playbook unfolding in front of us.

Good night and good luck.

Amazon Dot CON: The Bezos Con Grows With Revenues

The mainstream financial media headlines reporting Amazon’s Q2 earnings release were shamelessly pathetic:  “Amazon crushes Street forecast,” “Amazon beats again in Q2 thanks to cloud services.”  It was beyond nauseating.  The entire spectacle reminds me of the tech bubble, when companies like Cisco, Sun Microsystems and Intel would intentionally “guide” Street analysts into publishing a low consensus forecast the CFOs knew could easily be topped with accounting gimmicks.

Bezos applies all the traditional accounting gimmicks plus he’s created his own, Bezosspecifically with regard to his definition of “free cash flow.”

I don’t want to spend a lot of time on this.  I’ve wasted most of my evening untangling AMZN’s numbers as reported in its 8-K filing.  Let’s just say that if you dissect AMZN into its “product” and “AWS” components, the results are underwhelming.

Nothwithstanding the fact that AMZN intentionally guides the Street to low-ball estimates ahead of its quarterly earnings report, as you can see from the graphic below, which I created by dissecting and rearranging the sales and operating income numbers from AMZN’s 8-K filed today, AMZN’s growth numbers are underwhelming (click to enlarge):

Untitled

The sales growth rates for AMZN’s AWS (cloud computing) revenues and operating income are declining rapidly.  AWS is a new business started from scratch a few years ago.  Of course it’s going to show a high rate of growth initially.  But stock analysts and the mainstream financial media make it sound like AWS is a money tree.  Yahoo Finance reports that AWS is “massively profitable” LINK.

Well, look for yourself.  The sales growth on a year over year quarterly basis has dropped precipitously from 81.5% in Q2 2015 to 58.2% in the latest quarter. This is a rapid slowdown in growth.  The yr/yr quarterly growth rate for AWS operating income, which was $718 million in the latest quarter, has plunged from 407% to 83.6%.   “Massively profitable?”  You can see that AWS’ operating income actually declined from Q4 2015 to Q1 2016.  Declined.  Cloud computing services are not seasonal.  So that would not explain the drop.

Furthermore, AMZN does not disclose how much of its “technology and content” expenses are attributed to AWS.  But its total line-item cost for this in Q2 was $3.8 billion.  Yet, AWS’ total revenues for Q2 was $2.9 billion.  To be sure, a significant portion of that $3.8 billion in tech costs go with AMZN’s online product sales.  But it’s possible that none of the expense is amortized into AWS’ cost of sales.  Bezos won’t break that out.    He was doing a similar trick with “fulfillment” before the SEC forced AMZN to include fulfillment as a separate line item in the early 2000’s.

Let’s drill down into AWS’s numbers, to the extent that Bezos’ disclosures will allow:

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The chart above shows the quarter to quarter growth rates for AWS.  Again, recall that cloud computing services are not seasonal.   From 2014 to 2015, AWS’ annual growth rate was 70%.  But on an LTM basis thru Q2 2016, that growth rate has collapsed to 26%.  With operating income the decline is even more dramatic.  From 2014 to 2015, operating income grew 182%.  But this growth rate on a quarter to quarter basis for Q2 2016 has plunged  to 19%.

Bezos is the master of deceptive presentation.  But as you can see, rearranging the numbers into a more traditional financial analysis format removes any “sizzle” Bezos imposes on the numbers and reveals that AWS’s growth rate is collapsing.

Circling back to the first chart, you can see that AMZN’s overall profit margin on 90% of its revenues base – its product sales – is more or less 2%.   This profit margin is less than half the profit margin of two of AMZN’s primary competitors, Walmart and Target.  In general, retailers produce 4-5% operating profit margins.  In other words, 90% of AMZN’s revenues significantly underperform that of AMZN’s competitors.

For this investors are paying a 186x trailing p/e for a business with a rapidly declining growth rate and profit margins well below average for retailers.

Finally, the Bezos’ shamelessly promoted Free Cash Flow metric  turns out to be borderline fraudulent.   In fact, buried deep inside the footnotes to AMZN’s SEC-filed 10-K/Q is a disclosure that states that the “free cash flow” number used in AMZN’s promotional slide is not a GAAP-derived number.

Why?  Because Bezos conveniently excludes the cash AMZN’s spends every quarter to pay for property and capital equipment that AMZN finances with capital leases.  He also excludes stock-based compensation, which turns out to account for about 50% of AMZN’s salary expense.   It’s highly misleading.   To give you an example, the very first slide which is shown in AMZN’s quarterly investor presentation is the  Bezos-concocted “Free Cash Flow” bar chart shown on a trailing twelve month basis:

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This is the very first slide Bezos hits the market with. Talk about shameless promotion, I’ve never seen anything like this in over 30 years of financial market experience. This is more absurd than any type of misleading hype that I saw in the junk bond market.   And I thought junk bond presentations stretched the limits of credibility.

But here’s the best part.  If you strip out the ongoing cash outflows used for capital equipment and building expenditures by AMZN each quarter for the last four quarters, that “free cash flow” of $7.3 billion LTM shrivels down to $2.5 billion.   THEN, if you net out stock-based compensation for the trailing twelve months, which is a GAAP number, that Free Cash Flow metric of Bezos’ disintegrates down to just $85 million.

Pundits will argue that capital lease payments are eventually non-recurring and therefore should not be included in a free cash flow calculation.  But that argument is entirely disingenuous and highly flawed because these payments have grown from $1.8 billion in 2013 to $5.4 billion on an LTM basis through Q2 2016.   I like to call these, sarcastically, recurring “non-recurring” expenses because it falls into the “non-GAAP” earnings category that every big corporation gets away with presenting now.  Bezos clearly stretches this to the limits of the imagination.

Now, Bezos’ promoters would argue that stock-based compensation is not a use of cash and therefore should not be included in the Free Cash Flow number.  But that is patently false.  Here’s why.  The definition of free cash flow is that amount of cash flow that is available to shareholders after all cash payments are accounted for.  With stock-based compensation, AMZN hides this cash-cost to shareholders because this economic cost to shareholders does not show up until the employee registers its shares and sells them.  This increases the shares outstanding – or dilutes shareholders.

Employee stock compensation shares are registered and sold every quarter.  The amount per quarter is increasing at an increasing rate because the nominal amount of shares given as part of AMZN’s payroll increases every quarter.  Thus, the amount of shares outstanding at the end of every quarter increases.  This effectively reduces the amount of free cash flow per share that would otherwise be available to shareholders. Therefore the cost of employee stock compensation should be treated as cash cost each quarter and should be netted out from “free cash flow” just like it would be if the employee compensation were paid in cash instead of shares.  

There are several other areas in which Bezos uses creative accounting in order to bamboozle the market.   Unfortunately Wall Street, Capitol Hill and the SEC look the other way.  Wall Street because AMZN is a perpetual source of revenues.  Washingon, DC because Bezos spends millions buying Congressman and because has the use of the Washinton Post as political weapon.

There’s no way to know when the AMZN Ponzi scheme will collapse.  They all do eventually.  But I can say with certainty that, perhaps other than Tesla’s Elon Musk, Bezos is the greatest Ponzi scheme operator in history.

World’s Most Speculative Mania?

The western media – especially any mainstream U.S. news source – has made it a habit to blame the world’s problems on Russia and China.   The U.S. economy is aces – when the U.S. stock market drops it’s China’s fault.

Bloomberg published a report yesterday which presented China’s commodities futures market as the world’s most speculative mania:

What started as a logical bet — that China’s economic stimulus and industrial reforms would lead to shortages of construction materials — quickly morphed into a full-blown commodities frenzy with little bearing on reality.  Bloomberg News

But let’s put China’s commodities trading frenzy in the context of the stock that I estimate is the biggest corporate Ponzi scheme in U.S. history:

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AMZN trades at a trailing GAAP p/e of 562x.  I use the term “GAAP” here quite loosely because there’s GAAP and then there’s Jeff Bezos GAAP.  It trades at 23x book value, 30x tangible book value and 40x EBITDA.    Bezos claims that AMZN threw off  a couple billion in “free cash flow” for Q1.  Yet, if this is a provable fact, how come AMZN’s cash balance declined $3.4 billion from the the end of Q4 2015 to the end of Q1 2016?   Someone is not telling the truth…

It did not hit me until this morning (this was well before the Zerohedge article reporting a similar concept later in the day) that the reason the SEC and Congress do not open an investigation into Amazon’s accounting is because Jeff Bezos owns the Washington Post. That’s a very powerful weapon to dangle in front of a Washington, DC politician or bureaucrat.

AMZN stock hit an all-time high today because some chode from a Wall Street bucket shop issued a “buy” with a price target of $1,000.  The analyst did not have any specific fundamental reasons for why the stock was worth $1,000/share.  But then again, I’ve never seen anyone besides this blog and a few others attempt to hold these Wall Street hand-puppets to any reasonable degree of accountability.

The Bloomberg article references the the Dutch Tulip bulb mania of the 1600’s and the internet bubble of the late 1990’s in the U.S. when referencing the frenzied activity in the Chinese futures markets.   How convenient for Bloomberg to overlook that the fact that the greatest investor fraud of all-time is domiciled right here in America.

Yes, I suppose just like Bloomberg’s assertion that Chinese commodities futures “started off as a logical bet,” at time in its infancy as an online book reseller Amazon’s stock was a logical bet.   But fueled by Fed money-printing, regulator-enabled fraudulent accounting and extreme investor greed, Amazon stock is the embodiment of a financial system that is completely corrupted to the core.

AMAZON dot CON: Find Out Why The Stock Was Slammed After Q4 Earnings

A reader reports: Hi Dave, I’m in the Amazon puts with 300 strike price that I bought on Jan 17 before they reported earnings. I’ve made $7500 on the trade. Also I read that you think silver is the play of the decade! I’m going to take those profits plus $2500 and buy a box of silver eagles and put the rest of my capital from the put trade back into more AMZN puts!  Thanks!

NOTE:  AMZN has run up over $40 since its post-earnings slam.  Of course Jeff Bezos being the consummate stock market operator announced a $5 billion share buyback. He’s attempting to push the stock back up because he dumps shares every month and, more important, when AMZN drops back to earth (i.e. below $100) he’ll have a cadre of pissed off employees who agreed to take a high percentage of their salary in restricted stock units (RSUs).  At today’s current price, Bezos has paid out close to $500 million worth of RSUs at much higher stock prices.   Imagine thinking you are getting paid $100k but when you go to sell your stock, you find out that your salary during that time period was really $25k…My report explains these RSUs and shows why AMZN is the biggest Ponzi scheme in the modern era…

I’ve updated the AMAZON dot CON report and show what was in the numbers that triggered a $190 sell-off in the stock.  I’ve also updated the section of the report that outlines using calls and puts to short AMZN.

AWS will be one of the first cracks of the glacier but what will bring the whole thing down is when that RSU payment scheme unwinds itself.  Most analysts are overlooking one of the biggest accounting schemes at AMZN in the history of any large public company:  how they pay a good chunk of base salary in RSUs and walking through what that means. That is going to be a day of reckoning for the business school case studies.   – a contact of mine who is a former Silicon Valley insider that specialized in tech company accounting

My report details AMZN’s Restricted Stock Unit accounting scheme and the ramifications for this Ponzi compensation scheme when the stock engages in bona fide price discovery, i.e. tanks hard.  You can access this report here:  AMAZON dot CON

The Pre-Earnings Promote On AMZN Begins

It began last night with FB’s earnings release, which triggered a spike in both FB and AMZN stock after-hours:  LINK.  I have been very clear to the subscribers of my Short Seller’s Journal to avoid shorting AMZN ahead of its earnings release after the market today.  I also advised them to take profits on any short positions or put positions last week.   I have been on the record stating that I fully expect AMZN to report a blow-out quarter.  The trick is to understand how and where they are using GAAP/non-GAAP to inflate the net income and “free cash flow” numbers they will report.    AMZN continues to burn cash and will continue to burn cash.  That’s the bottom line.

Point in case is this puff-piece from Bloomberg News this a.m. which describes how AMZN generates revenues – yet it fails to describe how AMZN turns those sales in real net income and real cash flow.   FYI, AMZN states in the fine-print of its 10K/10Q filings that its reported “free cash flow” number is not a metric that conforms to Generally Accepted Accounting Principles – a fact that should not surprise anyone who does real research and analysis on AMZN.