Is Amazon.com, Inc. (AMZN) Stock About to Burst?

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Most stock bubbles involve real companies with real earnings. In this way, the dot-com bubble of the 1990s was an exception. But the “Nifty 50” of the 1960s, the oil stocks of the 1970s and the leveraged buyout kings of the 1980s were all real companies with real earnings. Some of those companies are still around. The problem occurred when investors couldn’t decide upon the upper limit of their value, and bid them to the skies.

Is Amazon.com, Inc. (AMZN) Stock About to Burst?

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The same is true for big tech stocks today. Exhibit A is Amazon.com, Inc. (NASDAQ:AMZN). Amazon is a great company; I own some AMZN stock in my retirement account.

Despite having 2016 sales of $135 billion, it’s still growing at over 20% per year. It dominates in cloud, in artificial intelligence — it’s the king of all media and of course it leads in e-commerce. That domination is extending around the world.

What is that performance worth? Is it worth 183 times earnings? Is it worth 3.5 times sales, when most of those sales are retail?

Really?

AMZN Stock: Nothing Else Working

Some of the arguments for buying Amazon at today’s price are becoming increasingly ridiculous.

What is the next catalyst for gains? It’s opening a bookstore? It’s talking to Dish Network Corp (NASDAQ:DISH)? It’s talking about bringing checkout-free grocery stores, which didn’t really work in the U.S., to Europe? A wedding shop?

Analysts who once called AMZN a Ponzi scheme for its lack of profit now see anything the company does as a sign of genius. It could bring in $25-50 billion per year on the sale of drugs, but how much of that will flow into Amazon and how much just through Amazon, as it rents its fulfillment and cloud?

For all Amazon’s size, and the talk that it’s becoming a monopoly, its margins are still 2%. This includes its Prime membership, $100 per year from 66 million people for which it need do nothing, and the 28% margin business of Amazon Web Services. Profit is still leaking out in all directions, or being invested back into the business, and operating cash flow is still sometimes negative, as it was for the first quarter.

These are small complaints. They’re barely complaints. For Amazon stock, they’re features of the business, not bugs. But when you buy AMZN stock today, you’re expecting those shares to be worth more tomorrow, and you want your returns to be better than in an alternative investment. As numbers get bigger, it gets harder to grow them by the same percentage. That’s just math.

The Big Tech Bubble

AMZN stock isn’t the only big tech stock that’s ridiculously valued in today’s market. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is priced at almost 9 times its revenue. Netflix, Inc. (NASDAQ:NFLX) is priced at about 8 times its revenue. Visa Inc (NYSE:V), a transaction processing company, is valued at 14 times revenue and over 56 times earnings.

Stocks fall when everyone is buying. A market requires both willing buyers and willing sellers, those who are skeptics as well as those who are hopeful. Bubbles happen when skeptics flee the scene.

Smart Investing Editor, Charles Payne says Amazon stock is due for a “pullback” and God bless him for that. Nothing goes to the Moon — not even AMZN stock. Valuations that can’t be explained rationally collapse.

All this has powered the average S&P 500 stock to an earnings multiple of over 25. It was over 40 at the peak of the dot-com bubble, and practically to infinity at the time of the 2008 collapse, but in those cases, there were hardly any earnings.

Meanwhile the Shiller price-to-earnings ratio today is at 29.45, close to where it was at Black Tuesday in 1929, higher than it was before the 2008 collapse and Professor Shiller himself is on TV saying the market could still go up.

It could. But when the market turns, small investors don’t get out until all their returns are gone. I have seen this movie before. It ends in tears. There’s a big tech bubble growing, and you don’t want to be there when it pops.

Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL and AMZN.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/amazon-com-inc-amzn-stock-burst/.

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