AMAZON dot CON: The Con Job Strikes Again

Regarding AMZN AWS Services business:   Another thing that will pummel them simultaneously is analogous to what happened to Sun Microsystems which I remember my CTO predicting before they crashed. Sun Microsystems stock was on a tear during the tech bubble but they sold a ton of equipment to venture backed startups. As that unwound, there stock was destroyed. –  see below

Note:  I see David Stockman agrees with my analysis – AMZN bubble  – I will have more on this later but he takes AMZN’s reported Free Cash Flow as given.  The FCF number is highly misleading and I show my equity report why this is the case – and AMZN even admits in so many words in the footnotes of its SEC-filed financials that the FCF presentation is misleading.

I watched in sheer horror as Amazon’s stock price soared straight up 80 points after it released its Q2 earnings today, up 17% from its NYSE closing price.  CEO Jeff Bezos’ net worth jumped $7 billion after his highly misleading earnings announcement.

The headlines reported that AMZN’s sales were up 20% year over year for Q2 and that net income had swung from a loss of $123mm to a profit of $92 million yr/yr for Q2.  While those numbers are what they are, sales growth from Q1 to Q2 was a mere 2.9% – pretty much in-line with the rate of inflation.

The media propagandists attributed AMZN’s highly “surprising” quarter to big gains in its AWS business segment, which is its cloud-computing business.  However, if we drill down into the numbers made available in its 8-K, we find that the AWS segment represents just 7.7% of AMZN’s revenue stream vs. 6.6% of revenues in Q1.   Sure seems like a lot of manic hype over well less than 10% of AMZN’s business model.

As it turns out, AMZN’s AWS business model, like everything else it does, is seeded in low quality sources of revenue that will ultimately prove to be unsustainable.  Why?  See this comment sent to me by someone who read my Amazon research report and who used to specialize in high tech accounting for Silicon Valley start-ups:

I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO…Amazon Web Services is growing by leaps and bounds and a significant amount of those $’s are coming from venture backed start-ups. Almost the entire Silicon Valley and other startups outside the Valley use AWS. Venture backed startups have exploded just as AWS revenues have exploded…That segment of their business will get walloped which right now seems to be a main source of their operating income.

As many of you are aware, private equity capital has fueled an unprecedented tech bubble in Silicon Valley.  Companies with no revenue are infused with printed money at multi-billion capitalization rates – hundreds of them.  They all use cloud-computing services provided by companies like AMZN because it’s so cheap relative to building and maintaining an independent, secure system of servers and storage, which is what large established companies do for obvious reasons. Most of these companies spending money on services like AMZN’s AWS segment will eventually flame out.  It may not happen until the stock market bubble bursts, but it will happen.  And AMZN’s over-hyped business segment representing less than 10% of its revenue stream will flame out.

I have a lot more work to do drilling down into AMZN’s financials in order to wipe away the brown stuff flying at us from Wall Street and Bezos.  I need to wait for the Company’s 10-Q in order to do that.  I will be producing an update to my research report that will be made available to anyone who has previously purchased the report.

After the update is released, the price of the report will be raised for new buyers.  This is because the report will contain some significant analytic enhancements, a couple of which were made aware to me by the accounting professional above.  It’s significant accounting manipulation that is well-disguised. You can access the original report here:  AMAZONdotCON.

But for now, here’s a few financial facts from AMZN’s quarter which show that AMZN’s headline numbers were misleading and much more hype than substance:    AMZN’s cash has dropped $4.3 billion, or 30% since 12/31/14;  while AMZN is touting its “non-GAAP free cash flow” metric, actual cash provided by operations per the cash flow statement in the 8-K was significantly lower at $1.9 billion;  AMZN’s cash interest paid on long term debt increased 490% yr/yr for Q2, from $31 million in Q2 2014 to $152 million in Q2 2015 (didn’t hear Bezos mention that today…);   AMZN’s SG&A expense increased 26% yr/yr for Q2 – at a greater rate than sales growth (my bet is they moved some “fulfillment” costs into SG&A in order to make it appear as if the cost of fulfillment decreased as a % of revenues.

There are a several other ways in which AMZN uses highly misleading accounting techniques to dress up its GAAP financial presentation.  As I detail in my stock report – AmazonDotCon – the  most absurd and misleading metric AMZN touts is its “free cash flow” number.  Buried in the footnotes of its 10-K is a disclosure in which AMZN admits in so many words that the number is essentially b.s.

While the extreme market intervention by the Fed and the U.S. Treasury’s Exchange Stabilization Fund have made it extremely hazardous to short ANY stock right now, the flip-side is that they have blown a stock market bubble that is bigger than any previous bubble in the history of this country.  While it’s impossible to time the top, fortunes will be made by people who can position themselves short in stocks like AMZN ahead of the drop that’s eventually going to hit our system.

bezos_laughingFrom January 1999 to the bottom of the tech crash, AMZN dropped from $113 to $5.51 – a 95% drop.  We can expect an eventual plunge of similar magnitude this time around.  I am certain of that.  The only question is timing.AMZN_PIC

10 thoughts on “AMAZON dot CON: The Con Job Strikes Again

  1. The only problem is that Wall Street refuse to look at numbers in a critical way.
    They use rose coloured sunglasses and they will never find anything negatives in regards of their “Silicon Valley babies”
    Just neglect anything that could be bad and look the other way and pump the scam to the moon.
    It reminds me of when the regulators refused to investigate Madoff even though evidence was handed to them

  2. So I’m sitting on this plane to Europe hosing down my 2nd jupiler (belgian beer)
    it’s the 28th August 2001. I’ve booked a great paying tour, all on this new fangled interweb and I’m thinking gee the old media is dying in the ass. They must hate seeing dirt miners like me kicking ass with out licking theirs…. and then I’m thinking no way they can buy the entire internet? I didn’t quite understand the implications of infinite credit. Next i’m on the dutch french border and the date is sept 11. I’ve had this sick ache in my gut ever since that day.

    1. I have a section in ALL my short-sell reports that reviews capital and risk management strategies. You would already know that if you supported my work 😉

    2. It doesn´t matter if you are short and temporarilly loses money when the trade goes against you.

      The important thing is that you still have your position in order when the tide turns because at that time it´s to late to put your short position on.

      I dont care what happened yesterday as long as I´m not wiped out and still in the game when it turns.

      Look at the race in Google recently and now AMZN- maybee we are reaching some kind of “blow of top”

  3. Almost all the large companies on exchanges use phony accounting to beat earnings plus for weeks leading up the the quarterly earnings announcement they are cajoling/begging/pleading/Bribing? investment bank stock analysts covering their stock to lower revenue and earnings projections so they can beat to trigger their stock options. I will say this again, but the best way to short is to do a hedged short with a long straddle where you buy a put and a call at a specific strike price. It’s worked for me in the past quite well…

    1. Good observation, Jason. I put most of the blame on central bank inflationary policies, because there are few true stock “investors” these days. That is, those who plan redeeming their shares directly from the company in which they’re issued. Stock, after all, is a claim on a portion of a company’s balance sheet. Yet who redeems stock anymore when there are suckers with easy money to sell it to? Quite literally, the stock market has become a giant ponzi scheme since stock values aren’t connected to rational production (profits and losses), but rather on whether there will be more buyers than sellers of such memberships.

      In fact, considering Dave’s great points about AMAZON, I think most companies would be scared silly of a massive redemption-demand by stock holders. Hence, I believe much of the motive behind stock-buybacks from such fraudulent companies is because they know that, like any other ponzi-scheme, market saturation is reaching critical levels…and they’d rather be in debt (knowing full well of the Fed’s bailout safety net) than to be held criminally liable (which would virtually shatter faith in all stocks). Nobody wants to be the next Enron that craters the marketplace (at least not overtly).

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