Submitted by William Bonner, Chairman – Bonner & Partners
Bad Stuff Happens
Into each life some rain must fall
But too much is falling in mine
Into each heart some tears must fall
But someday the sun will shine.
– “Into Each Life Some Rain Must Fall,” The Ink Spots
PARIS – Bad stuff happens. There is no getting around it. No denying it. No pretending it isn’t so. The only real question is: Where are you when it happens? It can be fun to sail out far from shore… until you realize you forgot to pack the food hamper.
Bad stuff happens so often, they’re writing books about it….
How much better it would be to have understood your girlfriend’s meth addiction – before you married her. And what a thrill you get from watching your go-go stocks rise like rockets… but you don’t want to be standing beneath them when they start to fall on your head.
The River of No Returns
The Dow shed another 365 points on Wednesday – for a more than 2% fall.
“Stocks take a beating as alarm grows,” announced a Wall Street Journal headline. Between just two companies – Amazon and Google (now called Alphabet) – $100 billion of fantasy capital has been lost since the beginning of the year.
Fifteen years ago, we tagged Amazon as the “river of no returns.” Since then, the share price has soared. The company has flourished… and we have looked like an idiot.
Every AMZN bear has been made to look like an idiot – but that may soon change. As David Stockman recently pointed out, those who actually take the time to properly analyze its slippery accounting and business model (not the dead fish employed by the sell-side, obviously) cannot help but conclude that it is a giant Ponzi scheme – and the danger that this realization will penetrate the “market mind” is increasing. It remains a “river of no returns” – although consumers have every reason to love it. Investors buying it today pay 830 times net earnings for the stock – and said net earnings actually look somewhat dubious upon closer inspection – click to enlarge.
On paper, the company is worth a fortune. CEO Jeff Bezos has shown the world what a genius he is. He has constantly reinvested Amazon’s cash flow to gain market share and garner headlines.
But wait… The bankruptcy courts are full of geniuses. And being able to sell the public your story is not the same as being able to sell a product at a profit and return earnings to the shareholders.
Despite all the water under the bridge, as near as we can tell, Amazon is still the river of no returns.
Where’s the Money?
In a bull market, investors are content with hope, hype and earnings tomorrow. They are patient and don’t ask too many questions. But in bear market, hope goes into hiding, patience fades… and the question marks come out in the open.
“Where’s the money?” they ask. Investors want cash in hand, now. They want dividends. They want protection from tides and full disclosure of the risks. Even after a 16% haircut over the last two and a half weeks, Amazon is still trading at over 830 times net income.
And this is no “latest technology” play headed by a tech wizard. Jeff Bezos only had limited exposure to tech before founding Amazon. And he has no real background in retailing either. He is a Wall Street man. And Amazon is no technology play. It’s a financial play.
Bezos worked for banks, investments firms, and hedge funds before launching into e-commerce. He started Amazon in 1994. The company was founded on technology and market conditions as they existed back then. The old river has been silting up ever since.
Jeff Bezos is indeed a genius. He runs a company that has produced practically no earnings over its entire lifetime (on the basis of sound accounting principles, that is). And yet, he himself is nowadays worth well north of $50 billion.
Photo credit: amazon.com
Let’s see… Amazon says it made $328 million last year. It’s valued in the stock market at $495 billion. The stock sold for $581 on Wednesday.
Hmmm… As a mature company, it should be valued at about 15 times earnings. Since Bezos is such a genius, we’ll stretch and give him a price-to-earnings ratio of 20. That makes the company worth about $6.5 billion and gives us a target price per share of about $14.
About 10 years ago, we guessed that Amazon was a “decent $10 stock.” The numbers say we were just about right. But it all depends on where you are when you find out.
If you are comfortably in gold, cash, and real estate, you can look on Wall Street’s decline like a neighbor watching a police raid on a noisy party. But if your portfolio is full of Amazon shares, we advise you to duck out the back door.
A little reminder from the not-too-distant past: the technology bubble of the late 90s. This shows the Nasdaq Composite and the SOX (semiconductor index) from 1997 to 2002. Eventually, the entire bubble gain was wiped out. We still remember debating true believers right near the top in early 2000. Nearly all of them thought prices would keep rising, even when confronted with what were by then almost impossible to refute arguments. It was clear that the growth rates reported by tech companies at the time could not possibly continue – it was simply a mathematical impossibility – click to enlarge.