Amazon - Next Stop $100 Or $1000?

| About: Amazon.com, Inc. (AMZN)

Summary

AMZN, the most famous dot-com stock, has a market cap about 80% of GOOGL's adjusted for cash; and GOOGL trades rich at 31X TTM EPS.

This article acknowledges AMZN's substantial business achievements but analyzes the stock price as unattractively high.

Risks to all of its businesses, mostly related to growing competition, are identified.

This leads me to conclude that $100 per share is a reasonable valuation, allowing future rapid profit growth to actually reward shareholders.

Background

This is my third attempt to identify an overpriced or over-loved stock in a Seeking Alpha article. In 2013, I wrote a series of bearish articles on IBM (NYSE:IBM), when it was roughly in the $180 range. In one of them, I suggested a target price around $135; this came to pass even though stocks (NYSEARCA:SPY) have moved up sharply since then.

Then, almost a year ago, I analyzed Valeant (NYSE:VRX) after it had been slammed by short sellers to about $100 from a high above $250 just two months earlier. My analysis was that even if all the allegations about improper behavior were false, VRX was not even worth $10 per share. VRX is under $23 right now; indeed little has come from those allegations. (I continued to write negatively on VRX at least down to the $30s, but do not plan to write about it again unless there is a new reason to do so.)

This article is similar to those in that it argues for Amazon.com (NASDAQ:AMZN) to be attractive to longer-term investors interested in value, not momentum, only at much lower prices (or, eventually, much higher earnings). Unlike my IBM and VRX articles, I've got nothing against AMZN as a business. However, I believe that it is overrated as a business due to a combination of bubbles in tech that began in 2011 and the ZIRP policies of central bankers.

Valuing AMZN, at a $390 B market cap, down to perhaps a $40 B market cap as I suggest could make it risky but attractive, would still leave it in the range of many fine, strong businesses, as is discussed below.

I'm listing this article under "short" ideas per Seeking Alpha's classification, since I believe AMZN is overpriced. However, I have no financial interest in any way in AMZN and do not expect to have one. This was the same as with VRX and IBM. I'm simply approaching this as a financial writer presenting facts, analysis and opinion.

Overview of my theses on AMZN

My main thesis is that AMZN is priced in a reckless manner typical of investment bubbles, and that its valuation ignores numerous material risks. Just some of these risks include:

  • garden variety bear market
  • severe bear market which could see AMZN at $100
  • recession
  • depression
  • growing competition
  • narrow moats to its businesses
  • thin margins
  • historic inability to establish a reliable profit stream - which should be a river by now
  • innovative company, but with limited profit-driven innovation.

My secondary thesis is that while AMZN has achieved a great deal in a short time, there is much that truly great companies have achieved that it has not done. Just think of many of the great tech names from the 80s, or a younger company than AMZN, namely Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) or an even younger one, Facebook (NASDAQ:FB). Each of them now has highly profitable wide-moat profit streams with less expensive stocks than AMZN.

AMZN's profits - nice; but we should be realistic - they have been choppy and remain unpredictable

Here's one way to look at the most important way to look at most companies (biotechs, with long incubation periods for their new products, are some of the exceptions).

AMZN was founded in 1994 and began doing online business in 1995, so it's about 21 years old. Yet it's only marginally profitable. In contrast, Cisco Systems (NASDAQ:CSCO) was founded in 1984; by the 90s, it already had a wide-moat, high profit-margin hardware business, and has kept leadership in that business until now. Most dominant companies in the tech or retail field I know of that, when large, have the following sort of recent profit history receive much more cautious valuations.

Here is one way to look at AMZN's after it reached age 10.

I've broken its average annual EPS into 4-year segments, as follows (Value Line data). Of course, revenues kept growing throughout all the following periods:

  • 2004-7: $0.80
  • 2008-11: $1.83
  • 2012-5: $0.40.

Value Line's last report on AMZN presents a 10-year EPS growth rate of -4.0% and a 5-year growth rate of -26.0%.

That's with about 27% CAGR of revenues over both the 5 and 10 year periods. Whereas, if you look at other iconic software companies such as Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL), profits and rapid profit growth went hand in hand with revenue growth from the get-go. That's because they had true profit-driven innovation. They didn't just take on huge amounts of business with zero profits to that additional business.

Despite this weak earnings record, AMZN stock is up about 20X since 2004. Its price:sales ratio has even increased, from about 2:1 then to about 3:1 now. This increase in price is extraordinary given the above profit history. Also, the increase in price:sales ratio is noteworthy; as companies get very large, typically their P:S declines as they move toward filling their niches in the business world.

The rising book value means much less than it might. This has increased from nil in the 2004 period to well over $20 per share. However, as of 6/30/16, AMZN only had retained earnings of $2.5 B; and of course it has never paid a dividend. There have been some share buybacks that lead to subtractions from book. The entirely major component of book value is "capital surplus" of $13.4 B (which happens to equal book value). For readers who are new to investing who may ask, what is capital surplus (aka, additional paid-in capital)?

From Investopedia:

  • Capital surplus is equity which cannot otherwise be classified as capital stock or retained earnings. It's usually created from a stock issued at a premium over par value.

AMZN's entire share equity comes from selling stock, both to outside investors and to insiders who were cashing out their options.

Yet has never paid a dividend, spun off a company to shareholders, or bought back a meaningful amount of stock.

Of course, it's understood that it has valuable intangible assets such as brand name and first-click status for millions of people on the Internet, but after actively doing business for 21 years and having many years of a de facto first mover advantage, I expect more tangible value. That was the story with Apple (NASDAQ:AAPL) almost from the start, from MSFT, etc.

Interim conclusion:

There is nothing much in either AMZN's earnings record or capital position to impress anyone. All it has demonstrated to date is an impressive revenue growth record and strong intangibles.

Again, AMZN has achieved much, and its valuation should reflect its future profit potential, which is wide -r potential. but it has reached a valuation that should reflect more realized profit success with real, significant retained earnings and a proven wide business moat.

Let's look more deeply at the numbers and AMZN's challenges.

A brief review of Q2 results

These were well-received. From the July 28 press release:

Operating cash flow increased 42% to $12.7 billion for the trailing twelve months, compared with $9.0 billion for the trailing twelve months ended June 30, 2015... Free cash flow less finance lease principal repayments and assets acquired under capital leases increased to $2.5 billion for the trailing twelve months, compared with an outflow of $492 million for the trailing twelve months ended June 30, 2015. [Annualizing that puts AMZN around 40X that number, which is very high - ed.]

Common shares outstanding plus shares underlying stock-based awards totaled 495 million on June 30, 2016, compared with 488 million one year ago. [So they are bringing in cash steadily by selling stock to insiders.]

Net sales increased 31% to $30.4 billion in the second quarter, compared with $23.2 billion in second quarter 2015...

Operating income was $1.3 billion in the second quarter, compared with $464 million in second quarter 2015.

Net income was $857 million in the second quarter, or $1.78 per diluted share, compared with $92 million, or $0.19 per diluted share, in second quarter 2015.

These are strong comparisons; but remember how horribly earnings fell off after 2011. Of the operating income, Amazon Web Services represented the lion's share:

  • net sales = $2.9 B
  • operating income = $718 MM [more than half the total].

In contrast, these are sales and income for the retail business, first in North America and then in the rest of the world:

  • net sales (N.A.) = $17.7 B
  • operating income = $702 MM
  • net sales (R.O.W.) = $9.8 B
  • operating income = $135 MM loss.

The result of the above:

  • net sales = $30.4 B
  • operating income = $1.285 B
  • net income = $857 MM.

So, net income comes in at less than 3% of revenues. Accounting for only 10% of revenues, AWS provided more than half the operating income - at least as AMZN allocates its costs.

Wall Street extrapolates this recent earnings trend straight up to the sky. I, however, believe that there are lots of outcomes that could occur from one year to the next - and that AMZN's own history shows that belief to be appropriate.

Some of those outcomes could involve severe margin pressure and outright financial losses if battles for market share get really nasty and the economic environment worsens. Also, one has to think of political and tax pressures that could become adverse.

Since, in a sense, AWS is a tail that wags the dog, I'll begin with reasons to value this segment realistically for investors who actually want to get their investment back with a positive return.

Will the sun shine forever on Cloud services and AWS?

A prudent point of view is to assume "No," and insist on real returns to shareholders either via solid cash build-up on the balance sheet, dividends, or other assets that are not merely book value of the hardware that's depreciating away while being leased to renters of computer space down on Planet Earth.

Outsourced data services has always been a tough business.

AMZN's AWS uses the first core competency of Jeff Bezos, computer knowledge, to provide various services to individuals and businesses. Of the three delineations of Cloud (Internet) services, software as a service (SAAS), platform as a service (PAAS) and infrastructure as a service (IaaS), the P&L growth of AWS is largely focused on IaaS. The Street expects continued massive growth from this industry; one reason that AMZN is so favored by analysts is that many give AWS a very high present value.

Of course, the business has growth ahead as the mobility revolution continues, so it becomes convenient to store data on the Web. But it's not the easiest situation either for the client or profit-seeking vendor.

I'm taking the position that just as investors were at certain points not willing to give Apple and Gilead (NASDAQ:GILD) the benefit of the doubt that the future was bright, the outsourced Cloud services business could end up for investors somewhat similar to the crash of the 3-D printing stocks. Remember 3D Systems (NYSE:DDD) and Stratasys (NASDAQ:SSYS)?

There are numerous reasons ranging from cost, security, ownership rights to the data, downtime, etc. that could lead IaaS to underperform frenetic expectations. And, frenetic the expectations are:

Of course, cloud computing is big business: The market generated $100 billion a year in 2012, which could be $127 billion by 2017 and $500 billion by 2020.

The public Internet has been around a quarter century or so, and as the above reference says, 5-year realized growth is only estimated at 27% in total.

Now, revenues are going to quadruple in dollar terms in 3 years, between 2017 and 2020? Despite ongoing price deflation due to technology, plus ongoing or potential price wars on top of ongoing deflationary pressures?

I will take the under. Taking the under means accepting and believing that just as AMZN itself warned in its 10-K, margins from AWS may contract. I would say that AWS could grow revenues and possibly incur losses - though it's strong enough that I do not expect that. But as an investor investing my and family money, I want to be compensated for risk. Getting 0.5% or 1% or even 2% implied earnings yields from such a volatile business is unattractive.

In addition to the known competitive pressures on AWS from established businesses with giant, wide-moat, high-margined profit centers that could easily sustain a price war that essentially bankrupts AWS, there is history on the side of those who approach this business cautiously - as I already said, outsourced data services is historically a tough business in which to make a sustainable buck.

With AMZN trading at 200X trailing EPS, I wouldn't pay more than 20X for this component of its earnings given its inherent volatility, growing competition from stronger, more profitable competitors and high capital spending needs with rapid depreciation schedules.

Then there's the fascinating retail division.

What's an attractive price for investors to pay for AMZN's "core" operations?

No one really knows, and that's much of the problem in a nutshell.

How do any of us have any real reason to expect that with every major player in the retail industry now coming after AMZN, its margins have anywhere to go but down?

Yet the stock is priced for them to rise, rise rapidly, and rise rapidly almost ad infinitum.

There are several AMZN-specific signs that not all is well in its quest to take a difficult business - mail-order retail (no matter that it's now e-mail-order retail) and get acceptable, even relatively low Wal-Mart-like (NYSE:WMT) margins out of it, as shown in the list below.

One is that in its quest for additional profits and free cash flow, AMZN rolled out Amazon PrimeFresh. This niche, a good-times luxury service that will not do well in a recession, was priced to help AMZN's financial results. Now prices are being cut, yet are still not cheap; from Oct. 6:

AmazonFresh is now less expensive for Prime users. While it had cost $299 annually for Prime+Fresh, users can now get unlimited grocery delivery for an extra $15 per month. Back in 2015, AmazonFresh was also offered to Prime users at $8 per delivery in California. With this update, the cost of Fresh has effectively dropped from $200 to $180 per year.

In addition, there is a $9.99 charge for orders under $40. So this is an expensive proposition for clients of Amazon Prime. AMZN's need to add this irritating, significant delivery charge for a non-trivial, say $30-$39 order shows that this is also an expensive proposition for the company. It's all reminiscent of Webvan. I think it's reinventing the wheel, a wheel that previously was not successful. I remember when Publix offered this sort of service, and quickly shut it down.

There's a reason that AMZN has had the online mail order business so much to itself - it hasn't generated much profit and the losers have been diffuse.

For example, Macy's (NYSE:M) has had a strong, active e-commerce division for years. In either 2013 or 2014, I recall its CEO, Terry Lundgren, comment how unfortunate it was that AMZN and e-commerce were getting so popular. He went on to explain that while it may appear easy, actually the costs of designing and maintaining the website, then doing all the fulfilment maneuvers, dealing with returns, etc. made e-commerce inherently less profitable than store-based commerce.

So looking objectively, AMZN is a low-margined retailer-distributor with a side line of self-designed electronics that it hawks on its website.

Now I'm going to guess AMZN's retail margins.

First I'm going to subtract the AWS segment's much higher operating margin. Value Line estimates an 8.4% operating margin and 2.1% net profit margin for AMZN for all of 2015 based on projected record EPS of $5.85. However, with 56% of operating profits last quarter coming from AWS, which has much higher margins than the retail division, that leaves me estimating the rest of AMZN, including its Kindle/Fire etc. proprietary lines of electronics, as follows:

  • operating margin 4%
  • net profit margin 1%.

This is likely not precise, but it may be close enough for these purposes.

Interestingly, these are identical to the numbers Value Line lists for AMZN as a whole in 2011, when AWS was immaterial to AMZN's financial results. So, yes, earnings are growing, but just look at the profit margins from the companies that are gearing up to compete with it.

Now, some tech (as AWS competitors) and retail competitors giving Value Line's estimates first for operating margin, then net profit margin for 2016, in percent:

  • Alphabet - 34, 23
  • Microsoft - 38, 24
  • Oracle - 45, 30
  • Apple - 33, 21
  • IBM - 24, 14
  • Wal-Mart - 7, 3
  • Target (NYSE:TGT) - 10, 4
  • Macy's - 12, 4
  • Costco (NASDAQ:COST) - 4, 2
  • Bed Bath & Beyond (NASDAQ:BBBY) - 13, 6
  • Best Buy (NYSE:BBY) - 6, 2
  • Kroger (NYSE:KR) - 5, 2.

The first 4 of those are competitors to AWS.

All except IBM have much higher gross margins than AWS and all are vastly larger than AWS, so you can see they can destroy its margins if they want a price war. Right now, the market is growing rapidly, so this is not a typical time for a true price war. But just as the right time for a long term holder of GILD stock who was willing to trade out of it had to worry about a price war in hep C drugs well before it occurred, the time for an AMZN customer to worry about AMZN retail's minimal margins is also before AWS might run into profit problems. After all, the insiders are first to know. You and I learn last.

Is AMZN's basic business really worth approximately 200X TTM EPS and perhaps 80-100X forward 2017 EPS?

My answer is again "No," not if the investor wants to have a reasonable assurance of return of principal with a positive return on that principal. There's almost no chance of that in any thinkable time frame.

Here's one demonstration of that view:

Value Line is forecasting an unbelievable (to me) jump in EPS for AMZN from $1.25 in 2015 to $21.40 in the 2019-21 time frame (how is that even possible?), and is willing to give those possibly peak earnings an extreme 35X P/E.

Yet it has a 2019-21 target price for AMZN around $750.

This is the perma-bullish Value Line.

But I think its profit views are outliers to the upside, and that it's just as possible that AMZN could be showing losses by 2020. That's just the way low-margined businesses with small moats work, especially given AMZN's historic indifference to profits as opposed to revenue growth.

Or, if profits got very large, maybe Mr. Market would then think they are finally peaking, and give them a single digit P/E.

What about all AMZN's ecosystem strengths?

They are likely fully in the stock and then some. Yes, the giant big box competitors in retail have not worried much about AMZN until now, because it was not siphoning all that much profit from them - until now. So AMZN has had the e-commerce distribution business largely to itself. Thus, all the Prime members; and despite them, AMZN operates almost at a breakeven level apart from AWS. This is before competition ramps.

And competition is ramping. WMT has purchased Jet.com. COST is responding. Macy's is enhancing its e-commerce capabilities further. Alibaba.com (NYSE:BABA) and other Chinese players are expanding.

I think there will be a clash of the titans. I'm looking forward to watching the fight.

After a very long bull market in the setting of reasonable resilience both to the US economy and for corporate profits, investors tend to extrapolate the trends of the past 5 years. Forgotten is the panic of 2008-9, when profit margins were hit hard.

But right now, today, as you read this, AMZN's business could be peaking. This could be why it is opening physical bookstores. This could be why it is opening small grocery stores.

AMZN is becoming its competitors just as they become it in e-commerce. But the competitors have all the advantages in physical retailing, whereas only price really matters in e-commerce. Physical presence provides somewhat of a moat. Once you're in a Costco and you see that bottle of wine or luxury chocolates, it's costly to leave the store, go check out some other vendor, and then if there's no better deal, drive back to Costco and buy the product. Whereas, online, it takes a Millenial mere milliseconds to switch websites.

Amazon Prime memberships are elective. AMZN's giant competitors, which as you see all have at least double its net margins, easily can swallow a year of Prime-like services free as well as competing on price. This could get nasty, especially in a stagnant economy.

This is the universal situation in narrow moat industries. An innovator takes a concept, makes it big, and attracts competition. Margins come down, the niche is now an established part of the economy, and eventually investors realize that it's just another business, not financial nirvana.

Now that AMZN has pretty much saturated the globe, with its latest success, India, only having a GDP the size of that of California, this looks like a reasonable time to suspect that we are at or near peak AMZN as far as the core business goes.

I say this as a survivor of peak GILD who took most of his money out by 2014 and mid-2015. Yet GILD has wide moats and 70% profit margins, and my remaining GILD is still getting clobbered. It can happen to AMZN and more so if thin margins turn to zero or negative. That's not a prediction. But a statement of investment fact in my humble opinion is that the share price should reflect adverse possibilities as well as great ones.

A word about expansion

Much is made about AMZN's alleged ability to disrupt an adjacent industry such as that of UPS (NYSE:UPS) and FedEx (NYSE:FDX).

I'll believe that when I see it. These are tough, efficient companies.

The delivery business is so difficult that one of the world's greatest logistics companies, WMT itself, used to control McLane, the country's largest grocery distributor to convenience stores, but sold it. Yes, of course, if AMZN wants to do its thing of accepting close to zero net profit margins, it can disrupt every business in the world over time, but what's in it economically for anyone? The idea that there is some large pot of gold out there for an allegedly more brilliant AMZN to run better and squeeze lots of basis points of margin out of is conjecture at best, fantasy as a middle ground, and pure hype at worst. Yes, the smart people at AMZN can find small pieces of gold here and there, but for a nearly $400 B market cap company, what of it?

So what's a fair price for AMZN?

Again, no one knows.

One way to think of earnings is the Value Line method that uses the past 2 quarters of reported earnings and estimated forward earnings for the next 2 quarters to give a full year estimate. Based on that principle, I'll use the $5.85 per share that both consensus and Value Line are showing. These are record earnings by far, and while consensus is for greater than $10 per share next year, Value Line is around $8; and given that AMZN ranks in the lowest 5% of all companies Value Line covers for earnings predictability, I'm ignoring all 2017 projections. (For the Street, these ever-bullish projections are basically just marketing tools.)

Unfortunately, we just don't know how to value AWS. But as a high-tech company, we can at least look at wide-moat tech companies, namely biotechs, to see how much more reasonably (attractively) the market is valuing them.

We have the rapid growth, wide moat company Celgene (NASDAQ:CELG), a leader in a secular growth business with no real competition for its lead product for a number of years to come, trading at $98.50, which is about 22X this year's likely GAAP EPS. CELG has absolutely guaranteed rapid growth for the next several years. It also has a somewhat speculative but possible high-growth patent-protected prospects into the 2030s. In addition, now that its stock price is under $100 and its market cap is $76 B (enterprise value is $84 B), its stock price is going to be supported by its obvious value to an acquirer.

CELG has gross margins that put almost every company in the world to shame: 99% or so. (And traders are worried they might drop to 98%.)

Verdict: CELG is more attractively valued than AMZN. I don't think the comparison is even close.

Similar thoughts for a higher market cap pharma company that, as is the case with AMZN, is not a takeover candidate, Novo Nordisk (NYSE:NVO). NVO right now is more like AMZN in one of its weaker years, given some FDA issues as well as perceived political threats to the industry. NVO is trading around 18X 2016 EPS.

Averaging the P/Es of CELG and NVO gives a 20X P/E. I think that if they can trade there, so can AMZN, which has a much wider and less predictable earnings course.

This gives no weight to the low P/E outlier comparator GILD.

I think it's fair to use record projected 2016 earnings for AMZN and give them that P/E. If we do, we get a fair value of $117.

While AWS has few direct public competitors that only do what AWS does, making P/E comparisons difficult (and they would be hyped as well), there are some retailers and electronics companies that have P/Es that can be compared with AMZN. These include several of the names listed above, including AAPL, WMT, TGT, COST and BBY. A blended P/E average of these names, all of which have higher net profit margins than AMZN's retail division, is in the teens, not 20s.

Subjectively, I think it's reasonable to average the pharma examples with the retail/electronics comps and come up with a comparable multiple for all of AMZN in the high teens.

Thus, averaging the tech part of AMZN with the retail part suggests to me a P/E off of prospective 2016 record EPS around 18X, which is not far from a $100 fair value.

That valuation would allow for real upside if the rosy scenario that Value Line and the Street lay out is achieved.

That would be exactly as investing should be.

It allows for real downside if AMZN is at or near peak EPS for some time to come. This is a serious threat, as within just a few years, AMZN may well have vicious competition in every part of its business from companies that have:

  • greater scale
  • greater financial flexibility
  • higher operating margins
  • higher net profit margins.

Before some concluding remarks, the CSCO analogy could be interesting.

CSCO in Tech bubble 1.0 versus AMZN in today's bubble

One similarity that was bad for CSCO and could turn bad for AMZN is how hard they work their people. AMZN famously puts many executives through "sleepless in Seattle" nights. I don't know for sure about how hard CSCO worked its execs back in 1999 (probably plenty hard), but a close relative of mine was a network specialist for CSCO back in those days, and they worked her and her colleagues really hard. Plus, they stuffed her compensation with CSCO stock.

Pushing people especially hard can be sustained in a bubble environment, when every news item is taken by traders as bullish and every lack of news is bullish as well; but once the stock gets valued as a normal stock, employees go back to being human and work normal hours. That could harm AMZN's vaunted creativity going forward.

Another similarity is that for quite some time in Tech bubble 1.0, CSCO traded around 150X TTM EPS. When the bubble burst, it found its stock near 5-year lows in October 2002, down more than 85% from its Y2K peak. Yet CSCO had something AMZN lacks, namely a wide moat in its hardware division that has persisted until today and will persist for years to come. If CSCO could drop over 85%, AMZN, with narrow moats throughout its businesses, might drop 90%.

Concluding remarks - do you want to feel unlucky?

AMZN is trading above 2000 times its average per share earnings for the last 4 full years.

Even if you assume one of the most amazing profit runs in the history of large US companies, as Value Line projects (along with the Street) - including commodity companies - it is still trading at perhaps 40X prospective EPS in the 2020-1 time frame.

Whereas by the time AAPL had finished such a run over a longer period of time, it found itself, net of cash around 7X EPS at one point, still with a wide moat for most of its businesses. GILD, which "merely" saw earnings rise 6X, also finds itself below a 7X multiple.

What all this tells this observer is that AMZN is incorporating into its valuation a combination of bubbles or extreme states. One is the extreme nature of the ZIRP or near-ZIRP environment for short term money. If one can imagine a 1% earnings yield for AMZN, rising at a rapid compound rate, isn't that better than cash or a bond? That's the reasoning.

Certainly, to be fair, rapid growth compounded long enough justifies almost any valuation.

In addition, we entered Tech bubble 2.0 in 2011, when only in the 2nd year after the Great Recession ended, the Street began floating overpriced shares of highly speculative companies such as Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA). Spurred by QE 3, it then entered into what might be called Tech bubble 2.0.1. Think of GoPro (NASDAQ:GPRO) and Twitter (NYSE:TWTR).

The combination of tech again being the most favored group this bull market (along with a subset of tech, i.e. biotech), with the current and sustained ultra-low interest rates, explains the extreme valuation of AMZN.

My valuation puts fair value of AMZN in the $30-40 B market cap range. That is where the average of the market caps of two iconic, great companies trade - Caterpillar (NYSE:CAT) and Deere (NYSE:DE). These are more important systemically than AMZN and have wider moats for much of their businesses.

On the other end of the spectrum, valuing AMZN in that range puts it in the valuation range of Regeneron (NASDAQ:REGN). Yet REGN's lead product, Eylea, is going to generate about as much pre-tax profit off of roughly $5 B in global sales as AMZN will generate this year off of $130 B in sales. And while Eylea has competition, it has wide moats both from patents and regulatory authorities.

Normally, as with the CSCO example above, higher margins mean higher valuations.

I believe that Amazonians could and would have taken pride in a much lower stock price in a different era in which investors were unwilling to support a marginally profitable enterprise indefinitely and then capitalize it at near-record levels.

From nothing in the 90s, Jeff Bezos led creation of a company worth tens of billions of speculative dollars, trading at several times book value with almost no retained earnings. This is an impressive feat.

However, at a price above $800, AMZN is crash-prone. Its growth story is universally known and priced in. Insiders sell and sell some more, all the while receiving zero cost stock. Jeff Bezos sold another million shares in August.

More or less every potential buyer at prices moderately below the market may largely also be in.

There is no risk to capital in not owning AMZN, and I'm enjoying that positioning. It gives me the chance to watch a fascinating scenario evolve in peace while investing in safer assets such as cash and bonds, and in equities with lower valuations and wider business moats. Will AMZN trade up to $1000 on more good quarters? Could be. But could a big bear market be heading our way just as competition ramps in AWS and retail, while demand in both division lags expectations? Could be. If so, I do think that per the CSCO analogy and my own reasoning above, $100 could also be seen.

Final conclusion: extraordinary achievement by Jeff Bezos and the team, but the stock happens to exist in an extraordinary time for pricing of financial assets. Risk is everywhere here, and downside action could be extreme, making AMZN anywhere near this valuation of no investment interest to yours truly and, I suspect, other investors who are willing to take certain risks but not when the downside possibilities are so extreme yet realistic.

Thanks for reading. All comments are welcome, including from AMZN bulls who have very different views on the company and the stock.

Disclosure: I am/we are long AAPL,GILD,REGN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser. No position in AMZN, though I think that it could be a short sale candidate, which is however not my style.