Amazon (AMZN) stock is breaking out to a new all-time high today. The “catalyst” ostensibly was news reports out yesterday that AMZN added 3 million Prime members during the 3rd week of Decemeber (of course, reported by CNBC) – LINK. The report suggests that AMZN has lifted “veil” on Prime.
But what is not reported in this article, of course, is the fact that AMZN was offering a free one-month trial of Prime. Hmmm, a week before Christmas and I can get free two-day shipping on anything I order? I’m surprised AMZN didn’t sign up 10 million Prime “members.” I wonder if CNBC will do a follow-up report next month which discusses the “churn” rate on the 3 million new “members.” “Churn rate” would be the number of free-trials which cancel after the free month.
CNBC also reported that AMZN had a “record breaking holiday” based on the fact that 200 million more items received free shipping this year, reaching a record number of shipments. This may be a record in terms of shipments but “free” shipping costs someone money. I don’t think UPS, Fed Ex and the USPS are shipping AMZN’s products at a loss. Someone bears this expense. In my AMZN dot CON report I show in detail how AMZN bears the cost of fulfillment and also does spectacular job of hiding this cost.
The Robo traders grabbed these headlines and started having a big party pushing the stock higher, which is up 32 points, or 4.8%, in less that two trading sessions.
Lost in all this excitement is notion that AMZN is the poster-child representing the fact that the U.S. financial markets are irrevocably broken. The entire financial system, especially the stock market, has become one big fraud. It’s reported that Apple’s shipments of the new iPhone from Taiwan manufacturers were cut 5-10%. This is not happening because demand is strong. The market doesn’t care, as AAPL is up over 2% today.
At $694/share, Amazon is trading at 988 times its trailing twelve month earnings per share of 70 cents. This EPS is calculated using AMZN’s version of GAAP accounting. Think about it this way: How many of you would buy a business in which you pay $988 for every dollar that business earns?
The Fed likes to refer to a process in which it seeks to “normalize interest rates” – whatever that means. Let’s assume we “normalize” AMZN’s p/e ratio based on the theory that AMZN can grow into a market p/e of 21 (roughly). On a trailing twelve month basis, AMZN’s net income was $328 million. AMZN’s net income margin over the last several years has been 1% or less. Let’s assume AMZN’s net income margin can “normalize” to Walmart’s 5%. In order to justify today’s price of $694/share, AMZN’s sales would have grow from $100 billion to well over $300 billion. How realistic are these assumptions?
If AMZN were to price its products and services based on standard cost accounting methods, it would have to eliminate free shipping and raise the prices on the products it sells. Many retailers are now matching any price on AMZN. In this regard, AMZN’s “competitive” advantage is being eroded. My stock research report shows in detail that AMZN’s reported “free cash flow” is highly misleading. AMZN burns cash.
Oh but what about AMZN’s now-famously promoted cloud business? Here’s an email I received from a reader who’s company uses AMZN’s AWS services:
Here’s a funny fact on AWS that again everyone seems to ignore or miss. I have a technology 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.
The point here is that – despite the heavy application of mascara on the wart-hog’s face – the bulk of AMZN’s cloud business is derived from the small tech start-ups being glorified by private equity firms but that will not be around in a few years. The pricing of cloud computing services has been plummeting. Sound familiar? Anyone remember the “fiber optic” bubble that precipitated the internet/tech bubble? Anyone remember a company called Global Crossing? GBLX filed bankruptcy in 2002. i’m not suggesting AMZN will go BK, what I am suggesting is that AMZN’s cloud computing business is all hype and hope. That $150 billion in market cap ascribed to AMZN’s cloud business will evaporate quickly at some point in time.
But here’s the coup de gras: A friend/colleague who is a Prime member who brags about the fact that AMZN loses money on him forwarded an email to me he received from AMZN. He titled it “AMZN sinks to a new low.” It turns out he received a “promotional credit” entitling him to a free digital HD copy of “Kung Fu Panda” on Amazon Video. He has to use this credit by January 15, 2016. The question is, who the hell wants to watch “Kung Fu Panda” even if it’s free? Obviously this is a loss-leader marketing ploy designed to get him on to the website where he might pay for something.
The right to distribute this movie was not free for AMZN. At some point someone along the food chain will have to pay for it. AMZN pays for it up upfront and then washes the cost of this by capitalizing the expense on its balance sheet. Eventually this game will come to an end, causing the stock to plummet. Don’t ask me on the timing of this event. No one knows. Bezos doesn’t care because he unloads 100’s of thousands of shares every quarter.
Ultimately the shareholders will pay for this: the funds who chased the stock price up to the stratosphere and the people who are invested in those funds. It will not end well…