Right. Amazon is the greatest thing since sliced bread. Like millions of others, I use it practically every day. And it was nice to see that it made a profit, thin as it was at 0.4% of sales in the second quarter.
But the instantaneous re-rating of its market cap by $30 billion in the seconds after its earnings release had nothing to do with Amazon or the considerable entrepreneurial prowess of Jeff Bezos and his army of disrupters. It was more in the nature of financial rigor mortis — the final spasm of the robo-traders and the fast money crowd chasing one of the greatest bubbles still standing in the casino.
And, yes, Amazon’s $250 billion market cap is an out-and-out bubble. Notwithstanding all the “good things it brings to life” daily, it isn't the present-day incarnation of General Electric of the 1950s, and for one blindingly obvious reason: It has never made a profit beyond occasional quarterly chump change.
What’s more, Bezos — arguably the most maniacal empire builder since Genghis Khan — apparently has no plan to ever make one.
To be sure, in these waning days of the third great central bank-enabled bubble of this century, net income measured by generally accepted accounting principles is a decidedly quaint concept.
In the casino it’s all about beanstalks that grow to the sky and sell-side gobbledygook. Here’s how one of Silicon Valley’s most unabashed circus barkers, Piper Jaffray’s Gene Munster, explains the e-commerce giant's Amazon Web Services
"Next Steps For AWS… SaaS Applications? We believe AWS has an opportunity to move up the cloud stack to applications and leverage its existing base of AWS IaaS/PaaS 1M + users. AWS dipped its toes into the SaaS pool earlier this year when it expanded its offerings to include an email management program and we believe it will continue to extend its expertise to other offerings. We do not believe that this optionality is baked into investors’ outlook for AWS."
Instead, better try this: Amazon’s operating free cash flow in the second quarter was $621 million — representing an annualized run rate right in line with its last-12-month figure of $2.35 billion. So that means there was no cash flow acceleration this quarter, and that Amazon is being valued at, well, 109 times free cash flow!
Moreover, neither its second quarter or last-12-month figure is some kind of downside aberration. The fact is, Amazon is one of the greatest cash-burn machines ever invented. It’s not a start-up; it’s 25 years old. And it has never generated any material free cash flow — notwithstanding its $96 billion of last 12-month sales.
During calendar year 2014, for example, free cash flow was just $1.8 billion and it clocked in at an equally thin $1.2 billion the year before that. In fact, beginning with net revenue of just $8.5 billion in 2005 it has since ramped its sales by 12 times, meaning that during the last 10 and a half years, it has booked $431 billion in sales. But its cumulative operating free cash flow over that same period was just $6 billion or 1.4 percent of its turnover.
So, no, Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino.
In an honest free market, real investors would never give a quarter-trillion-dollar valuation to a business that refuses to make a profit, never pays a dividend and is a one-percenter at best in the free cash flow department — that is, in the very thing that capitalist enterprises are born to produce.
Indeed, the Wall Street brokers’ explanation for Amazon’s $250 billion of bottled air is actually proof-positive that the casino has become unhinged. For more than two decades, Amazon has been promoted as the monster of the e-commerce midway, which it surely is.
But today’s $30 billion roll of the dice has absolutely nothing to do with the same day delivery of healthy treats for your pooch. This was all about the purportedly scorching performance of its Amazon Web Services division — that is, Amazon’s totally unrelated business as a vendor of cloud computing services.
Indeed, CNBC did not fail to get on air before the cash market open the most rabid analyst on the block, and this particular stock peddler from UBS left nothing to the imagination. Never mind whether anything emanating from that serial swindler and confessed criminal organization can be taken seriously, here’s what the man said.
AWS is technology’s second coming and is worth $110 billion. We know that because Amazon has recently been thoughtful enough to break out its financials. They show AWS had sales of $1.8 billion this quarter and revenues of $6 billion on an last-12-month basis. So that puts its value at 18 times sales or 16 times if you prefer to annualize the current quarter. No sweat!
This means that the balance of the company — that is, its E-commerce business — is “only” valued at an apparently much more reasonable $140 billion. And by golly, said the UBS man, that’s just 1.4 times sales. So what’s not to like?
Do the Math
Someone forgot to do the math in all the excitement about AWS. Yes, the company’s release did show that AWS posted $391 million of operating income or 21 percent of sales. But consolidated operating income during the quarter was only $464 million, meaning that by the lights of subtraction, Jeff Bezos great empire of e-commerce earned the microscopic sum of $73 million in operating income.
By the same magic of subtraction we can see that Amazon’s e-commerce segments generated $21.4 billion of sales. This means that its operating margin was exactly 34 basis points. That’s right — after 25 years of crushing it on the e-commerce front, Amazon’s profit margin is truly a rounding error.
Except it’s probably worse. Amazon’s helpful segment breakout shows that on a last-12-month basis, its e-commerce business generated $90 billion in sales — a number that is approaching Wal-Mart’s league, or at least the league it was in 1995. But AWS generated $975 million of operating income during the last 12 months compared to Amazon’s consolidated operating income of, um, $765 million.
Might we just dispense with the magic of subtraction and call it a $200 million loss on the operating line and dispense with corporate overhead, taxes and debt service?
Might we also ask why you would value at $140 billion the profitless sales of an e-commerce monster that just can’t stop spending every dime it takes in on distribution centers, package handlers, hired delivery trucks and drone prototypes; and now, apparently, same-hour delivery service by out-of-work actors and bank tellers who happen to own a Vespa!
Stated differently, the $30 billion spike at Friday’s open was not actually a re-rating; it was a instantaneous bait-and-switch operation by the high-rollers in the casino. Amazon is not the inventor and first-mover of e-commerce, after all.
Instead, it's now suddenly held to be a sure-thing, monster of the midway in the totally unrelated business of cloud computing services. So go right ahead. Take the second-quarter operating income of AWS and annualize it — notwithstanding that its first-quarter margin came in at a much lower 17 percent — and throw on a standard tax rate. That computes out to $1 billion of GAAP net income.
So by the lights of the UBS man and Wall Street’s amen chorus, AWS is valued at 110 times now, but will surely crush any competitor in the stretch ahead, and thereby grow its way into that outsized valuation.
Don't Tell Google
Except don’t tell Google, Microsoft, Oracle or several others about the beanstalk thing. Indeed, today’s nattering about AWS was truly ridiculous. Why would any one endowed with a modicum of sanity believe that these tech powerhouses are about to cede the cloud to Amazon merely because it comes first in the alphabet?
There is no other real reason for thinking so. Between them, the big three mentioned about have about $220 billion of cash and deep franchises in the world of computing and the Internet. Sure, when technology moved from owned boxes, corporate computer centers and software licenses to rent-a-server, Amazon got out of the gate first because it had no installed base of old technology to protect.
But there are no barriers to entry, no killer patents, no material brand equity, no unreproducible sales and service network that will permit Amazon to ring-fence the cloud. So there will be vicious competition and prices will fall at a rate that will make Moore’s law look tepid. Indeed, Larry Ellison has promised to cut prices by 90 percent, and he has rarely failed to follow through on exactly that kind of competitive rampage.
Likewise, it would appear that the cloud is destined to be the future home of Microsoft’s entire franchise. Surely it is probable that Amazon’s Seattle neighbor can make the transition from selling computer software to renting cloud services.
In short, Amazon has disclosed almost nothing about AWS’s detailed business model, its fixed and variable cost structure or the investment requirements of its rentable clouds and the rates of return on the massive amounts of capital employed. Only the Wall Street boys, girls and robo-traders betting on red could come up with $110 billion valuation of a nascent business that is positioned in the cross-fire of the Big Tech battlefield.
One More Fling
Amazon’s $250 billion valuation is just plain irrational exuberance having one more fling. Spasms like today’s $30 billion on the Amazon ticker or last week’s $66.9 billion on the Google account are absolutely reminiscent of final days before the tech wreck exactly 15 years ago.
Why don’t the gamblers see this? The answer is quite simple. They have been in the casino so long they wouldn’t know honest price discovery if it slapped them in the head.
Indeed, the nation’s and the world equity and other capital markets have been well and truly broken by the relentless, massive intrusion of the central banks and the resulting falsification of asset pricing everywhere on the planet. Friday’s spasm was just one more proof.
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