After I wrote the first "Distant Mirror" article comparing Apple (AAPL) today with Cisco (CSCO) in 2000, it was suggested that Amazon (AMZN) 2012 would be a more apt comparison to CSCO 2000. I chose AAPL because it, like CSCO, had the largest market cap and had become a kind of iconic name in the market. Of course, we all know what happened to CSCO. Although the company continued to grow and prosper, the stock tanked and today is trading somewhere between one fourth and one fifth of its peak value. The question before the house was whether AAPL was fated to endure the same kind of down swing. The comparison revealed two very different companies - one (CSCO 2000) priced at a huge PE (price earnings) and even a huge PS (price sales) ratio, the other (AAPL 2012) priced at ratios which are more characteristic of the overall market. There is still the question of whether the market can "digest" a mega-cap bigger than AAPL is today and bigger than CSCO was in 2000, but there are enough fundamental differences between the two situations to give holders of AAPL some comfort.
Some comments suggested that comparing CSCO 2000 with AMZN 2012 would show more similarity in valuation and impliedly in future trajectory. The issue intrigued me and the table below compares AMZN today, AMZN at its earlier peak on December 10, 1999, CSCO at its peak in March 2000, CSCO today and Wal-Mart (WMT) today.
|Price||Market Cap||Sales||Income||PE||Net Cash|
All numbers except balance sheet cash are based on the last full fiscal year prior to the stock quote. Balance sheet cash is based upon the last quarterly financial report prior to the quote. The rapid growth in both sales and earnings of both CSCO 2000 and AMZN 2012 means that they each would look less expensive if we were to use the current fiscal year in which the date of the quote is included, but we do not yet have such data for AMZN 2012 and so using the last full fiscal year prior to the stock quote appeared to be the best way to make a consistent comparison.
A few things jump out. It is sobering to note that CSCO has grown its sales and earnings by nearly a factor of 4 (per share numbers are even better) and yet it is priced at less than one fourth of its 2000 price peak. If you start at too high a price, it is very hard to "grow into the price" even if the company experiences solid growth. CSCO has essentially doubled itself twice in 12 years which translates to very nice 12% average annual growth and yet its stock is in the dog house.
Comparing AMZN 2012 and AMZN 1999, we see nearly 80 fold sales growth (one thing that I am confident about is that sales will not grow 80 fold from $48B over the next 13 years). AMZN 2012 does not look nearly as richly priced as CSCO 2000 (or even AMZN 1999). AMZN 2012 has much larger sales than CSCO 2000 and a much lower market cap and it thus initially appears less expensive at least on a PS ratio basis. But AMZN is a retailer and margins tend to be much smaller for retailers than for manufacturers. This is part of the reason I have included the data for WMT - which is trading for a little more than one half gross sales. AMZN 2012 is trading for a bit more than twice gross sales. It does not require an overly fertile imagination to picture AMZN 2012 growing into a reasonable PS ratio (perhaps .8 or 1.0) with sales growth in the next several years. The problem with AMZN's numbers seems to be low margin but that is often the case for a growing company constantly investing in expansion. AMZN 2012 has a PE which is less than the lofty PE of CSCO 2000. It is also true that AMZN 2012 hit higher earnings numbers in a year prior to the one used here so its "earnings capacity" is arguably greater than indicated in the number above. On the other hand, for AMZN to achieve earnings of 1/15 its market cap (earnings of $7.5 B) assuming the same margin achieved in the above data, it would have to have gross sales of roughly $600 billion or considerably more than WMT has now. More likely, AMZN will find that the path to greater earnings involves an improving margin.
What does all of this mean? On the one hand, even using AMZN 2012 as a comparison, today's market does not seem to reflect the same "irrational exuberance" we saw in 2000. AMZN 2012's market cap today is considerably lower than CSCO 2000's and a collapse in AMZN 2012's share price will not destroy the amount of investor net worth that went down the drain when CSCO 2000 tanked. Arguments can be made both ways and we are hopelessly biased because we know what actually happened to CSCO 2000, but I still think that a very strong case can be made that AMZN will do better over the next 12 years (in terms of stock price) than CSCO has done since 2000. AMZN is well on the way to growing into a reasonable PS ratio and, as it matures, should be able to improve margins considerably.
On the other hand, CSCO now trades at less than one fourth its 2000 peak share price and an even lower percentage of its 2000 market cap. CSCO has not experienced financial distress. In fact, its gross sales, balance sheet cash and earnings have all seen robust increases in the last 12 years. Ironically, perhaps, CSCO 2012 has actually become a "value stock" paying a nice dividend. The problem is that the March 2000 price assumed such an explosive growth in earnings that CSCO 2000 was almost foreordained to fail.
AMZN has a great business. I use it all the time. A book I purchased recently dealt with a very controversial criminal case. AMZN permits users to file book reviews and scores of reviews and even more comments were filed so that the AMZN website became a kind of epicenter for the debate about the case. Many of the reviews referred readers to other books providing more information about the case (which they could, of course, easily find and buy on AMZN's website). This is "network economics" at work and AMZN is a master at the art. I have no doubt that AMZN will grow and prosper. However, it is not hard to conjure up a scenario in which AMZN prospers over the next decade or so but the stock winds up lower ten years from now.
I do not generally buy stocks like CSCO 2000 and AMZN 2012 and I don't short stocks because I have always found easier ways to make money in the market. So, in a sense, I don't have a dog in this fight. But I think that it is very likely that AMZN 2012 will do better over the next 12 years at "growing into its price" than CSCO 2000 has done. I also think that the pricing of AMZN stock is not a sign of an "overbought" or frothy market. AMZN 2012 does not represent nearly the share of the market absorbed by CSCO 2000 and is not as optimistically priced based on generally recognized metrics. There are always going to be some stocks priced at high PE multiples; that offsets the single digit PEs on other stocks to produce a market wide average in the mid-teens. While I am not inclined to "back up the truck" and buy AMZN at this price, I do not see its pricing as a repeat of the CSCO 2000 phenomenon or as a sign that we are now in the same kind of overpriced market we experienced back then.