Amazon.com: Has The Bubble Finally Popped?

Investment Research Dynamics

It’s good to no longer be a lone voice in the wilderness.  This latest commentary on the insane overvaluation of Amazon stock comes from Bill Bonner of Agora Research by way of the Acting Man blog:

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.

Interestingly, a lot of AMZN critics still insist on describing AMZN as company that generates “cash flow.”  But, as my AMAZON dot CON report details, the metric being describe as “cash flow” comes from Bezos’ own quarterly earnings presentations in which he references “free cash flow.”

For those of us who bother to scour the footnotes of AMZN’s SEC filings, we find that AMZN discloses that its “free cash flow” metric does not conform to GAAP accounting standards. But I take that disclosure in my report and show, with details from AMZN’s financials, why the term “free” in reference to “cash flow” is highly misleading.  In fact, over the last two years the cash used by AMZN to “invest” in its business model has come largely from debt issuance and from gift card and Prime membership deposits.

Amazon Prime?  Bezos admitted about a year ago that Prime loses a couple billion, a fact confirmed by one analyst in July but ignored by everyone:  LINK.  The idea behind Bezos’ strategy is to do whatever it takes to generate sales growth.  The stock price soars when it looks like AMZN is growing rapidly.   However, as my report details with direct evidence from the financials, revenue growth is required in order for AMZN to pay its expenses.  In other words, the only way AMZN stays afloat is if “cash in” exceeds “cash out.”  That’s the definition of a Ponzi scheme.  AND, as a matter of fact, as I show in my report, AMZN has stretched out its accounts payables over the last few years.  This is a trick companies use in order to slow down the rate at which they pay their bills.  If revenues begin to decline, AMZN will hit the wall – quickly.

As I state in the introduction sent to new subscribers of my Short Seller’s Journal, it is impossible to time the top in AMZN.  But once it rolls over, it will drop quickly.   You might miss the move from $600 to $400, you can ride it from $400 to $100 or lower.  AMZN ran from $300 to almost $700 in less than a year.  It can easily complete that roundtrip in even less time.

There’s probably a core level of operations that can be a profitable business. But it is nowhere near the level that generates the current $100 billion of revenue.  AMZN spends at least $1 to generate every $1 of revenue.  That core level of potential profitability would likely imply a fundamental value per share well below $50.

I would not necessarily rush out and short AMZN right now.  It will probably start to move higher into its earnings report on January 28 (after the market close).  I have a feeling that Bezos will pull out all the stops to manufacture an earnings report that beats consensus estimates and the stock will gap up again as all the hedge funds that piled in short this week scramble to cover.  THAT is when you want to start pulling the trigger on shorting the stock.  My AMAZON dot CON report will help you prepare for that.