The Capitalist Manifesto

The Capitalist Manifesto
Contributor since: 2013
Very logical. I have been a big AMZN bear for 3 years and have been "wrong" based on the path of the stock price. This is a prime example of people not understanding long term valuations. At some point, the amazing growth stops. If AWS is so lucrative, which it is, you will see even more players enter the cloud space, which has already happened (i.e. Microsoft) to try to take away market share. They are entering high margin businesses that become lower margin due to competition, much like the retail portion of their business was and is today.
Of course, it's hard to tell people who think Bezos and Amazons are the next coming of Christ, but these are the same things that were said in 1999/2000 when tech stocks that had no profit were changing the world. "It's different for them. Value is down the road." Ok. Fine. But at what price? It isn't worth an infinite amount of money, but yet the stock has doubled this year? For what reason? Because they made $0.17 per share instead of losing $0.13 per share? Doesn't add up to me.
Valuations aren't based on comparing an overpriced company to itself in the past and saying "hey look! it was more overpriced before! now it's a buy!" Valuations are based on historical valuations of its competitors and in almost every fashion, AMZN is at the most overvalued level.
I am not arguing that AMZN is disrupting businesses, but like one of the users above said the same thing back in 1999. And look what happened. To say that stocks shouoldn't be bought because of Cash Flow or Book Value is not investing. It's speculating. More power to you. But just because a momentum stock goes up, doesn't make you right.
The long run is what matters. Because far more of these companies have gone under than have done what AMZN has done.
When the market finally does go down from its nosebleed valuations, I am venturing a guess that AMZN will be one of the worst ones hit...just like it was in August. $537 to $463. They were in the middle of their best ever quarter with crushing earnings and still dropped 14%.
Everything always reverts back to the mean. I guess I can't say everything, but unless there is a PERMANENT shift in something supply or demand related (like paper product usage won't revert back to the mean because of new technology), these things do revert. It's hard in overvalued times, as well as undervalued, to believe things revert. But looking at 140 years of stock market history, with interest rates all over the board and good times and wars and everything imaginable, it's interesting how it always reverted back to the mean...granted, it would go above or below, but it never stayed permaneently above OR permanently below.
It's hard in this market to believe in this. But stay with it! You will do well.
I see what you're saying but my point is, with fundamentals, and understanding that things revert to the mean eventually, when fundamentals are undervalued, I can buy knowing that it will eventually revert. If you look at history for ANYTHING over time, reversion to the mean always occurs and I can use that info to buy when fundamentals are undervalued. Remember, fundamentals are based on means.
i am not looking for investments that start with the letter A and have a board member who is second cousins to the president. I look for fundamentals that have stood the test of time by teachings of Graham/Dodd/Buffett.
I also backtested the things I knew wouldn't work...and guess what..they didn't...over time. In short sprints, anything can happen, but over long periods of time, the fundamentals prove to work.
Over an extended period of time (through a full cycle) 18.8% over multiple bull and bear cycles. But, i reiterate, I don't just look at my results during a bull or a bear. you have to look at a full cycle or more. and it can't be partial cycles.
That is true. I bought and sold every year to avoid long term survivor bias. And I bought companies that were in the top 20% of market cap, which today would be $1Billion. Those companies are not immune to sinking to zero, but it rarely happens in 1 year.
Good point though!
That's true!
That is correct!
Incorrect. I used fundamentals that have worked over 140 years and have been proven by value investors like Ben Graham and backtested to see if they proved right. And then I backtested fundamentals that have proven to not work...and big surprise...they didn't beat the market.
Gary, I assume you are buying like crazy right now, right?
Name me other companies who were this ridiculously overvalued and that ended up, over decades, growing in value? This is unheard of. Not sayign it's not possible, but why would it be different this time?
Wow. I've heard this before. It never ends well.
Exactly. I just asked a high school class today what "investing" was and they said "putting money into something and it going up or down in value." So I asked "Is gambling and the lottery, therefore, investing?"
I don't know what "smart money" is because the last time I checked, chasing a stock because everyone else has it and they don't want to be left out isn't very smart. And that's what money managers do. They have to. I don't blame them, but don't say that you're right just because momentum is working.
Gary: If Amazon went to $10 per share tomorrow, would that make Amazon a bad investment? I would argue that it's a good deal now! But according to your theory, $403 down to $10 means bad investment.
Do you see my point?
Yep. Investment. That's what I'd call it too. (Insert sarcasm here) As is said above, the fact that you can't say whether AMZN is overpriced or under priced shows the lack of understanding of the fundamentals of a company. Nothing in the world of AMZN says "good buy" from a fundamental valuation standpoint. Could it still go up? Of course. But it has a lot of catching up to do to even justify today's value.
HAHA! Everyone is drinking the cool-aid. I love how they are comparing Bezos to Jobs. Yeah, Jobs' company made $37Billion last year and Amazon made...?
This stock is unreal.
And please stop saying you're "investing" in Amazon because the definition of investing is not this...this is speculation.
I am interested to find out what "smart money" Gary is referring to. The only people I know supporting AMZN are the ones who don't understand financials and investing or are short term traders.
I don't consider analysts smart at all. I don't consider money managers smart at all. They jump ont he AMZN train because if they are right, they ride the wave up and if they are wrong, they say "everyone else got it wrong too." That's not investing. That's pandering.
Gary, I am not kidding. I realize that the stock has gone up, but it's not worth $363 per share. And real money being returned to real investors is in the form of dividends and retained earnings. I want my return to be secure and not based on speculation, as is the case from Amazon.
Amazon has no business being worth $363 today. If you believe that, you aren't an investor. You are a speculator. It may work today and tomorrow, but eventually it will come back to haunt you. It's no secret that the best long term money managers are ones who buy based on value and business fundamentals...not castles in the sky.
Of course this is spot on! If this were a start-up! This is a company that is 17 years old and has $70Billion in sales and still cant make money!
Look at every other business out there: Ford, GM, Microsoft, Wal-Mart, GE...etc...they ALL INVEST back into their businesses and spend billions doing so. But what else do they do? They are able to make money. Consistently. Look at old company Microsoft. This company is considered dead and yet their revenues increased by 20%, I believe, while Amazon also rose, but for a company that is still playing the "growth" card, how do we justify the value?
Also, the one thing you didn't mention is that valuations are based on metrics. Would you buy ANY business for 10 times revenue? CRM is worth $32Billion but it has $3Billion in sales? Really?
I definitely agree in paying for future potential, but don't pay a reasonable amount and discount for your risk that you are taking. Don't just give them the keys to the car before they have proven they can drive. A 2 year old will be able to drive someday, but we don't give them the keys because they haven't yet. Let's not give Amazon a valuation of $165Billion before they have earned that or even the potential.
If they stopped spending like crazy on Cap Ex, what would their NOI be? They would still be no more than $3Billion and with $165Billion valuation, that's still 53 times earnings! Come on. Give me a break. I believe in giving value for future growth, but still it has to be reasonable.
We can speculate all day long about their actions, and to me, a company that has over $70Billion in revenue needs to stop acting like the growth start-up of 17 years ago and start returning money to investors.
How is it not a major concern that they have yet to do that?
Value Investor, the problem is, you aren't comparing apples to apples. ALL companies reinvest...look at WMT and their cap ex budget and expenses. They are ALL reinvesting...AND making money....AND paying out a dividend....AND are brick and mortar, so they have more costs.
You can't say that Amazon is only not making money because they are spending a ton more now. WMT actually spends MORE as a % of revenue than Amazon does. So why are we giving credit to Amazon for something they are doing inefficiently?
And I are you a value investor if you like Amazon? The point of value investing is finding companies that are worth a lot more than they are selling for because the market is ignoring them. This is the exact opposite. You would never buy Amazon in full for $150Billion today. If you would, you would go broke eventually. This MAY work out for you, but 9 out of 10 times, it won't.
I am a bear on Amazon. I don't doubt it's a great service. But for 17 years, it hasn't made much money. I think, in total, it has made $1.6B...IN TOTAL.
I get that it is willing to sacrifice short term gains for long term value. That's awesome. But why give them the value TODAY for what they are trying to build tomorrow? THAT is why it's a scary long term proposition.
Amazon is just a company that is trying to build long term value by investing today. Unfortunately, there are also other companies that do the same thing AND make money and pay dividends.
In Amazon's best year ever, their margins weren't as good as Wal Mart and Wal-Mart has brick and mortar! That's supposed to cost more to operate.
I don't doubt that they are investing for the future but please, let them prove that their investment is working before we drive their stock price up.
I am short Amazon and I have been killed on it so far. But short term results don't worry me.
If you assign a 20 PE to its future earning potential (which is still aggressive), at today's value, it needs to make $7.5 Billion and with margins of about 3.5%, that's $215 Billion in revenue (which is almost 4 times greater than today...even growing at 20% per year, it will take them 7 YEARS to get there). Can you wait until they get there and earn that money before you give them a stock price worth $150 Billion?
RROSEY2: Thank you for the comment. Yes, some of your points are what hurts markets long term. There are always negatives to every situation, even when markets are booming, like now.
I think the important thing to see is that there are certain basic metrics that are important when evaluating markets. There are always going to be some negatives. I am sure back in August 1982 when the big secular bull started, there were tons of negatives...but it's valuations that matter. And right now, valuations are NOT conducive to a secular bull anytime soon.
And where is discussion on profit margin, profitability and multiples of profitability? Isn't that what really matters when valuing a company?
I'm not waiting for the "drop some"...I am waiting for the collapse that this stock deserves.
Hope you're right Paulo! My short took a big hit today but I believe in the long term value of the downside.
It amazes me, to this day, that people are still drinking the KoolAid
Thanks for the article.
I find it interesting that everyone still doesn't have exact numbers when talking about the bottom line and there is constant focus on Jeff Bezos. If it's all about how brilliant the CEO is, why wouldn't Berkshire Hathaway sell for 200+ times earnings? If any company would deserve that, it's them.
The REAL bottom line is that Amazon has a hard time making money, even when factoring in their capital expenditures. In no way, shape, or form is this company a $120 Billion company.
At the end of the day, the only thing that matters IS the real bottom line. When they are making $7 Billion to $8 Billion in profit per year, it will be a $120Billion company because their growth potential will have decelerated significantly.
Lucas, it is great when all the arguments are bullish...remember, be fearful when everyone is greedy.
There are SO many solid arguments for why we should be short Amazon. The question is, do we have the time to wait...I do, so I choose to be short. I am in the positive on my short now but that was only as of late. I was in the hole for quite some time.
Moat?!?! Ha. It's an internet company that sells stuff. Yes, it has a big brand, but what kind of moat is a moat where margins are 2%? Hardly worthy of getting deemed a "moat."
Gadget, I believe ALL great companies reinvest and diversify. But they also make money. In Google's rise from their 2004 IPO, do you remember a time when they sold for 200 times earnings? Or anywhere close to that? Talk about an innovative company and a DIVERSIFIED company.
This is not meant to disrespect, but the "reinvest" and "diversify" argument is made by those looking for a light at the end of the tunnel. At the end of the day, even without their diversification, Amazon is still selling for 70+ times earnings...still way too rich.
Anyway you skin the cat, it's drastically overvalued and yes, I am short the stock .
Thanks for another article proving that Amazon is overpriced. :)
One of these days, everyone will stop drinking the kool-aid and start to realize that a highly valued business needs to make SOME money to show that it's reasonably worth the value.