An unusual novelty in today’s markets, investment opportunities like Amazon don’t usually come by very often. Considered as one of the best investing stories, you would have made 46,000% if you were bold enough to have the shares on its first day of trading. To turn $1,000 into $460,000 is indeed a life-changing return for investors - even if it was 21 years in gestation.
Amazon’s unwavering ascent was more pronounced in the last two years, backed by a growth story that hinges on its e-commerce dominance and distribution strategy. It’s 300% climb in the 31 months preceding today - from $285 in January 2015 to $1,056 in July 2017 is nothing more than spectacular – this coming from a general market that moves incrementally higher with little real conviction.
Considering that much of the stock market is under constant scrutiny, only a handful could be identified as stellar performers amidst a corporate America that has posted modest but often flat earnings or even sharp declines like the energy sector. The last 31 months have narrowed the market to a Super 6 – yes, just 6 stocks that have captured primetime business news and investor affection – Facebook, Apple, Netflix, Google, Microsoft, and of course, Amazon.
The metaphor of the Super 6 of today mirrors the same subtleties and dynamics of the Four Horsemen of Tech back in 2000 – Microsoft, Dell, Cisco and Intel. At the March 2000 peak, Cisco’s PE Multiple was at 200x, Microsoft was at 60x, and Intel was at 50X. Obviously, these over-the-top valuations render the same scenario as today - with Facebook at 40x, Amazon at 190x and Netflix at 217x.
If the Four Horsemen of Tech of 2000 were any indication of what is in store for the Super 6 today, it becomes troubling really if & when the bubble pops and these stocks come tumbling back to their “corrected” valuation vis-à-vis the general market. Two years after the 2002 Tech top, the Four as a group had shed about 75 % of their valuation, letting go of around $1.25 trillion off their market caps.
High flying Amazon – whose stock has recently crossed the $1,000 mark, now renders an implied PE of 190X, one that is unashamedly absurd. For a company whose core business involves sourcing, storing and delivering goods – its inventory and distribution business sits in that sector of the economy that has only grown at 2.2% annually since 2000. Neither has it invented anything explosively new nor any life changing device like the iPhone nor hold any patents to life-saving drugs. For both value and growth investors, there is no micro or macro economic basis for its share price acceleration.
Capitalizing on the growth prospects of its ecommerce business model, similar companies on that same route have not boasted the Amazonian returns on their share price yet, even with fundamentals that are way too stronger. Walmart, after its purchase of jet.com has posted an explosive 63% ecommerce sales increase in the recent quarter. This, compared to Amazon’s meager 22% in the same first quarter.
It is now in this context that we see Jeff Bezos Amazonian model as fatally flawed. When these basics of realities start to bite, it will puncture a hole so fast as to deflate share prices to ‘realistic’ levels. Amazon is your best candidate for that 'Put' on an unsustainable bubble, flashing all those warning signs that are reminiscent of the dot com crash of 2000. Likewise, it might as well provide the triggering mechanism that will take the Super 6 down with it as well….
Welcome to the stock market jungle of discontent.