…A Bubblicious Breakfast Of Unicorns And Slippery Accounting
Consider the case of Amazon. Its PE multiple on LTM net income of $328 million has dropped from 985X all the way to…….well, 829X! Likewise, it’s now valued at 97X its $2.8 billion of LTM free cash flow compared to 117X at year end. In the same vein, Facebook’s LTM multiple on net income has dropped from 108X to 96X.
So the reason to revisit the FANGs, and the Amazon bubble in particular, is not because their market caps have come down to earth; it’s because once you get inside, another characteristic of late stage bubbles comes lurking front and center. Namely, the tendency for the accounting income of momo tech stocks at bubble tops to be bloated with non-sustainable revenues and profits from Silicon Valley burn babies…
…I was reminded of this possibility by an excellent post by Dave Kranzler at Investment Research Dynamics. In a piece called “AMAZON dot CON” he took me to task for being too kind to Jeff Bezos’s ponzi accounting. Among other things, Kranzler went all the way back to the beginning and offered an even more dramatic juxtaposition of the bubble in the stock versus the reality on the ground:
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.
You can read the rest of Stockman’s commentary on AMZN here: Amazon And The Fantastic Fangs
The ravages of collapsing oil and devaluation of a
countries currency produce these type of problems.
Is this a glimpse of Americas not too distant future ?
You mentioned that Amazon’s cloud business is made up of primarily small start up companies. I do software consulting work and understand that Amazon’s cloud computing model does not work well for the larger firms. Perhaps Amazon will solve the issues, then again perhaps not. I like the idea of shorting Amazon, but those puts are awful expensive.
That’s interesting color on cloud. Regardless of the suitability of the software, pricing in the cloud business has been highly commoditized. ORCL announced this past summer that would cut their prices 90% if they have to in order to defend market share.
Wait until the stock percolates up and then buy put. Or short the stock outright. Or short OTM calls. The reason the puts are expensive is because this stock was at $300 a year ago. The puts are pricing in the probability that it could be back at $300 w/in the next 12 months.