Amazon.com Inc. (NASDAQ:AMZN) is overvalued, but it’s not because of something Amazon has done wrong, or that the market has just missed AMZN.
Amazon stock, like the other companies often denoted as “FANG” — Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) known as Google — is simply in a bubble.
Cloud services are dominating this decade, just as Internet stocks dominated the 1990s. The difference is that the sector has matured and evolved toward the kinds of monopolies, or shared monopolies, common in other industries.
For example, consider The Coca-Cola Co (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), or Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC). Consolidation leads to lasting market dominance in every case, but its value is always overestimated.
AMZN is unique in that it has successfully created two such shared monopolies. It dominates commerce along with Wal-Mart Stores Inc (NYSE:WMT) and its Amazon Web Services (AWS) dominates the cloud alongside Alphabet and Microsoft.
Value Still Limited
At its opening value of $478 billion on June 8, Amazon stock is selling for 3.5 times its sales volume. That’s modest for a cloud company — Google’s market cap is more than 7 times its revenue. But, it’s unheard of for a retailer.
And, when you look at Amazon’s financials, that’s what you see, a retailer. During the last quarter, AMZN had net income of just $724 million on revenue of $35.714 billion. Those are Costco Wholesale Corporation (NASDAQ:COST) margins. More precisely, those are Walmart margins — WMT had $3 billion in net income last quarter on $117 billion in revenue.
There is an assumption among Amazon bulls that the company’s cloud operations will make up for this. I have been one of those bulls.
Last quarter, AMZN had $3.661 billion in AWS revenue, and brought a fat $890 million of that to the net income line. That’s an annual growth rate of 45%. You may expect AMZN to bring in $15 billion from AWS this year. But, if you value that at 10 times revenue, you’re still looking at $330 billion in market cap for a retailer with $120 billion per year in retail sales and no margins.
None of this is to say that AMZN is not an amazing company. I have 80 shares of Amazon stock in my retirement account, most bought in 2014 when the stock was barely at $300. I’m sitting pretty at about $965 per share.
But, there’s still a ceiling to everything. The problem is that the rest of the market is so bad now that no one sees that ceiling.
What Goes Up Must Come Down
It is normal, at the end of a bull market, for favored sectors to go parabolic. Nothing else is working, so everyone piles into what does work. Once everyone is into something, some event catalyzes the reality that values are not unlimited, that there is a ceiling.
The result is a crash.
Investors who hang in on the best stocks, on the monopoly players, are made good over time. This is Amazon’s second bubble. It reached its 1999 valuation in 2009, and hasn’t looked back since. But, investors who bought at that 1999 peak were underwater for 10 years. That’s fine if you’re 29. If you’re 62, it’s not fine. Unfortunately, more investors are 62 than 29.
I can’t name the catalyst that will pop this bubble, the “AOL Moment,” as when America Online took 60% of Time Warner Inc (NYSE:TWX) and everyone suddenly realized that internet stocks had found their maximum value. I can’t tell you when it will happen, either. There may well be hefty gains ahead, as our John Kmiecik writes.
But, if you don’t want to wait 10 years to be made whole, now might be a good time to get out of the bubble, while you still have your gains. It’s when everyone says something can’t miss, when everyone is in on it, that the bubble pops.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, 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 FB, AMZN, MSFT and INTC.
