Amazon Nearing A Trillion Dollar
Amazon Inc (AMZN)is the largest e-commerce company in the world with 40 plus percent control over all online sales in the United States. The company is one of the most followed by Wall Street and loved by financial media. Very rarely does anyone write a bad article or a bad analyst report on Amazon? How often does CBS, ABC, Fox, CNN, and MSNBC run negative nightly reports on Amazon? Not ever, they always talk up the company and its founder who is worth $130 billion. They cheerlead for the company and praise Jeff Bezos like he is a god to be worship. This has to lead to Amazon being one of the most overbought stocks in the world with a price to earnings ratio of 256 times. Base on the current price your paying for shares it will take over 256 years to make back your money.
Amazon’s current market cap is greater than the combined market caps of Walmart (WMT) and Alibaba Group (BABA) That’s insane, however, this has happened throughout market history where Wall Street and the Media believe a certain company or few will grow at double digits forever. However, we learn from the Nifty Fifty of the 1960s what happens when you put such a high valuation on Growth. In the 1960’s Wall Street and the media sold Americans on growth at ultra-high p/e ratios regardless of price.
The FAANG stocks are the Nifty Fifty of our generation and are the largest driver market point gains. It isn’t a shock that FAANG’s are the largest driver in the market for the upside and downside. The love in the media and Wall Street for FAANG’s are so overdone. Clearly, current media reports and financial articles being written are declaring Amazon a trillion dollar company.
When Amazon hits the trillion dollar market cap it will be larger than its top four competitors combined. Amazon’s top four competitors have a total market cap of $855.75 billion which is currently only $81.96 billion larger than Amazon’s current market cap. Currently, articles are being written of Amazon’s shares selling for more than $2,000 and achieving earnings growth of 50 plus percent a year for the next five years. However, none of these people show where they’re getting this growth rate or what numbers they are basing them on. This again shows a lack of intellectual honesty by the media and its blind following of Wall Street. Which they have done for the last 100 years, helping to fuel one bubble after another.
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Jefferies analyst Brent Thrill believes that Amazon based on the sum of parts will in the next four years hit the trillion dollar market valuation. Based on this analyst Amazon will increase by another third from current levels. Mr. Thrill sees “plenty of avenues” for Amazon’s revenues to double over the next four years to $500 billion. He believes that the company’s aggressive push into the advertising business will be a key driver going forward. Mr. Thrill thinks ad revenues for Amazon will grow from $4 billion to $22 billion by 2022. This isn’t the first time a Wall Street analyst said that Amazon would hit a trillion in market cap.
Back in November of last year, Morgan Stanley reiterated its believe that Amazon will reach trillion in a market by 2022. Analysts from both firms came to the same conclusions about Amazon on a sum of parts valuation model. It seems that Wall Street and the media have become an echo chamber on Amazon hitting a trillion market cap.
Morgan Stanley analyst Brian Nowak wrote a note to clients saying that, “Amazon’s high margin [revenue] disclosure speaks to the $1trln ($2,000/share) sum of parts bull case,” He went on to say, “Our sum of the parts methodology looks out to 2022 for the 5 various segments (1P, 3P, AWS, Subscription, and Advertising/Other) and applies multiples based on what we view are appropriate peer groups, factoring in relative growth rates and margin profiles. We discount each segment back to year-end 2018 to arrive at a $2,000/share value or ~$1 trillion bull case.”
In his note to clients, Mr. Nowak shared his valuations and forecast for Amazon business segments to justify the $2,000/share price by 2022. He gives Amazon core retail business a value of $600 billion based on certain growth estimates through 2022. Based on certain growth estimates he gives Amazon Web Services a $250 billion valuation. On the other hand, he gives Amazon subscription business $70 billion and advertising business a 55 billion valuation. All of his estimates are based on an optimistic scenario that doesn’t take into account Amazon long history of missing them.
What if Amazon misses his estimates for growth? What if inflation rapidly grows? What if Treasury rate double? What if there a recession is around the corner? What if the bull market is at its peak? I can keep going on with these questions. None of these questions are asked or taken into account. Since if they were it would be hard to justify his estimates. The lack of conservatism in a valuation of publicly trading companies like Amazon or Netflix is quite scary. Those who work on Wall Street and report on its are repeating the same mistakes of the past. They sound like they did in 1999, 1988, 1973, and 1929. History always repeats itself when people refuse to learn from it.
There is an on saying that perception is a reality if you perceive that something is real than it is. But sadly that doesn’t make it real, however, perception is quite powerful when its put in an echo chamber. Where is the critical thinker in the media and Wall Street?