The Upcoming Crash Of Apple And Amazon

Includes: AAPL, AMZN
by: Karl Denninger

I'll get flamed for this I'm sure, but I don't care.

Apple's stock price (NASDAQ:AAPL) is going to collapse, and Amazon (NASDAQ:AMZN) may in fact go bankrupt. There, I said it. Yes, I know the counter-argument, especially for Apple. The company has a boatload of cash and trades at a 16 current P/E. These are not, by traditional measures, "ridiculously overvalued" numbers (such as Netflix (NASDAQ:NFLX) had berfore it blew up.)

Amazon will also blow up; it shares Netflix's former screwball P/E (currently 101).

And when both go, and they will, the Nasdaq will collapse since these two stocks are an outrageously disproportionate piece of the index.

Why do I put this forward? Let's deal with Amazon first, since it's the simpler case. Amazon's primary "lever" is the ability to play around the edge of the sales tax system. This gives it an instant 6% (on average) price advantage over everyone else, more than enough to offset the shipping costs (which you pay in any event; whether shipped directly to you or to a retail store, you still pay for it in the product price somehow).

But that sales tax loophole is going to close. Over the next few years states will find a way, as the revenue shaft is getting out of hand for them.

Now here's the problem: Amazon has a 2.58% (ttm) profit margin and a 3.14% operating margin. This is less than the benefit they get from evading the state sales tax system. In short, this is a firm that only exists because of its ability to evade that tax structure. When, not if, that ends, the company is a literal zero.

Before you start hating on me I want to point out that in the late 1990s I made the claim (in public, and in print in an interview) that Amazon would go to $2; at the time it was trading near all-time highs around $100. I turned out to be wrong - it only got into the $5s. I would judge that call to be pretty good, on balance. In order to counter this analysis you need to show how Amazon loses that 6% price advantage against a 3% operating margin and survives. Best of luck with that.

Now on to Apple. There was a report out Monday that the firm had cut supplier deliveries by 25% out of Asia. There was a mad analyst scramble during the day to try to refute the damage that was rapidly accumulating in the stock, which was mostly successful. In my view, this was a fool's errand and you were a nut if you followed people into the stock on that "dip."

Apple gets a lot of its sales in Europe. But Europe is a train wreck economically. To believe in the forward story and that the production cut is not "real" you have to believe Europe will avoid a Depression. Given what's going on over there, such a belief is an act of pure insanity.

Oh sure, they might not get the worst of it right now, but this is a forward projection, not a call for a crash in the morning. You also have to believe that the United States will not suffer the knock-on effects and that sales here won't get hurt. And finally, you have to dismiss the fact that HP (NYSE:HPQ) effectively destroyed pricing power for tablets with their "blowout" of the Touchpad.

The latter may well be a stake through the heart. HP's "blowout" put the $99 price point in the mind of consumers and that is not going to go away. This sort of "ratchet" mechanism has a well-documented history in America, and once it takes hold it is almost impossible to get rid of. There are already signs that this pricing pressure is eroding the edges of everyone else's tablets, with the first to succumb being RIM (RIMM)'s "Playbook." This will reach Apple and margin collapse is a well-documented phenomenon that has a habit of trashing stock valuations.

Yes, I know that Apple has 10% of its enterprise value in cash. I know the firm has no debt. But I also know that the company spends like crazy on R&D and sell-through is everything to a firm that is playing in this space. The problem with these sorts of firms is that when you're running on afterburners it's nearly impossible to pull back without losing control and crashing, simply because you've built a culture and corporate environment that is filled with "true believers" operating at a corporate level where everything has gone right -- and thus you all believe it will continue to.

But the operating leverage from Europe and soon the United States as consumers of these products is coming to an end. While Asia is opening to the iPhone, the mass-market there is at a fraction of the price that you can charge here, and Apple has no proven history of being able to deliver at that lower price-point.

So here's the predictions: Apple trades under $100 at the trough and Amazon may well be a flat-out zero.

Yeah, I know those are both audacious calls, but there they are. This is not a call for an imminent collapse tomorrow, but rather a look at how both of these firms, and the "new tech" boomlet, is predicated on factors that cannot sustain themselves and thus must fail.

We'll see how it works out.

Disclosure: No positions at the time of this article in either firm.