I have pounded the table for Amazon (NASDAQ:AMZN) for five years. After getting pushback from readers, I even bought shares, at about $330 each, for my retirement account.
I sold half when they passed $1,000 and pocketed the profit. As it approaches its annual “Prime Day” summer clearance sale, the stock is trading at $1,73-per-share.
I can’t justify it.
A market cap of $845 billion means the company is selling for about 4.7 times its 2017 sales of $177 billion. Amazon Web Services was a $20 billion business last year, and 100 million people may pay $120 each for Prime this year, which is $12 billion for essentially doing nothing. I can see that being worth $400 billion.
That still leaves $150 billion in retail sales holding up a residual market cap of almost $450 billion.
I call bubble.
The Amazon Bubble
The Amazon investment thesis now is based on the idea that nothing, no force on Earth, can stop it from dominating everything.
That’s ridiculous. Walmart (NYSE:WMT) alone will still be more than twice its size this year, even if Amazon can deliver $200 billion in revenue on top of the $50 billion recorded for the first quarter.
Amazon still faces real competition in every area of its business. In cloud it faces Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The same thing in computing devices, and artificial intelligence. Oh, and Apple (NASDAQ:AAPL).
The U.S. retail market alone is worth over $3.5 trillion. Amazon is not a monopoly there, either. In entertainment it faces Netflix (NASDAQ:NFLX), in delivery there’s FedEx (NYSE:FDX) and its last-mile is owned by AT&T (NYSE:T) and Comcast (NASDAQ:CMCSA).
Amazon is still being beaten by Home Depot (NYSE:HD)
When Amazon is even hinted at being interested in something, say healthcare, all other stocks fall in reaction to it. Companies should at least have to enter a market before other companies die before it.
When Do Bubbles Pop?
None of this is to say that Amazon isn’t a great company. But it does mean the stock is overvalued, that it’s getting ahead of its results and that there are risks here that are being ignored.
Trump hates Amazon. European regulators hate it. China won’t even let the company in.
Bubbles pop when the full value of a company is realized, when everyone is screaming “buy buy buy.” At today’s valuation, 40 of 47 analysts following Amazon call it a buy, and only two have it as low as a hold.
What’s missing is a catalyst, an event that demonstrates the maximum value of cloud, or sets a limit on Amazon’s growth. The dot-com bubble popped when America Online effectively bought Time Warner (its shareholders got more than half the resulting company) in 2000. I’ve suggested this balloon could pop if Facebook (NASDAQ:FB) bought Disney (NYSE:DIS), turning its cloud into real assets at some specific price.
Rising oil prices and the growing trade war will hit every stock, but Amazon will continue flying above it all until something bad happens that’s Amazon-specific.
The growing rumble about “breaking up Amazon” could turn into a fire. European antitrust or tax regulators could poke a hole in Amazon’s results, or reputation.
These are long shots, but they are being ignored.
The Bottom Line
The current market recovery is approaching its 10-year anniversary. There’s now a certified nut job in the captain’s chair, and everyone in the luxury suites is drinking and dancing like it’s 1999.
It’s the point of the evening when I look closely at the lifeboats.
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 AMZN, MSFT and T.
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