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Amazon: A Bubble Waiting To Burst

|Includes: Amazon.com, Inc. (AMZN)
Summary

Amazon's Price to Earnings ratio is trailing at 189, exceeding the Nasdaq dot-com bubble maximum reached in 2000.

Amazon business model is less robust to recessions that it was ten years ago.

Historically there have not been periods longer than ten years without recession. The last recession ended in 2009, nine years ago.

Amazon is irrationally overpriced.

Amazon is an amazing business. Earnings and sales are currently increasing at a double-digit pace. But it is overpriced. It has become a bubble waiting to burst. As shown in the picture below, Amazon's stock price since 2010 overlaps with the dot-com bubble price curve. See how well Amazon's price follows the nineties Nasdaq curve (1994-2000). Almost exactly. But it is different this time. This time Amazon's stock price will keep increasing its trading value, no matter what are the fundamentals supporting the price. This time speculation will continue pushing prices up and up. Amazon's Price to Earnings? Only 189! Very cheap indeed.

*Source: YCHARTS & WIKIPEDIA

Edmund Burke said,"Those who don't know history are doomed to repeat it": What happened after the burst of the dot-com bubble is well-known. It should be. As it should be a clear warning to Amazon investors too. There is a moment when speculation cannot push further the stock price. Then boom leaves room to bust, mania is replaced by depression and a severe fall in prices follows.

The Nasdaq's Price to Earnings ratio hit 175 at the dot-com bubble peak. Now Amazon's Price to Earnings is trading at 189! I will repeat for a thirst time, 189! Higher than the Nasdaq's Price to Earnings ratio when it burst in 2000. Over 100 points above the greatest value reached in the zenith of another well-known bubble, the Japanese stock market in the eighties. Then the Price to Earnings ratio hit 80.

Moreover, in the middle of the nineties dot-com boom, in 1997, Amazon sales were growing over 800%. Then sales grew from $15.7 million in 1996 to $147.8 million in 1997. While now, as stated in the last quarterly report, they are increasing a mere 28%. Not enough to justify Amazon's current stock price at all.

*Source: YCHARTS

Not to mention earnings. Less than two years ago Amazon was losing money. Amazon earnings started a downward cycle in 2011 that took four years to end. In particular, note that there was not an economic contraction during this period. Since then, Amazon has started an upward earnings cycle, but, as its business core is cyclic, it will not last forever.

Nothing lasts forever. Everyone knows it. Historically, the period between US recessions never has exceeded 10 years. This is what history teaches us and this time will not be different (To Amazon investors' regret). The latest economic crisis ended in 2009, so we should be prepared for a new recession in the next two years. Maybe it is already here.

And history also illustrates that recessions are not funny. No, they are hard.

*Source: Federal Reserve Bank of St Louis

And history also illustrates that recessions are not funny. No, they are hard.

In recessions, people lose their jobs. And they cannot afford to buy a new car, or a new camera, or a new computer in Amazon. And Amazon's incoming statement will deteriorate. And they need to sell the Amazon stocks where have invested part of their saving. And Amazon's price will fall.

In recessions, people do not buy new houses, even lose them. And they do not need a new fridge, or a new kitchen, or new furniture. And Amazon's incoming statement will continue deteriorating. And Amazon's price will continue falling.

In recessions, people that have lost their job, perhaps, buy a few books as they have more free time. Books are not very expensive, and they can afford them. And Amazon's incoming statement will deteriorate less in this segment.

Yes, the last changes on the Amazon business model have made it less robust to recessions. From selling books to selling "everything" (from cars to bedroom furniture). Selling necessary or affordable products, like food or books, allows sellers to weather economic downturns better than sellers of unnecessary or high-priced product. It is precisely in the latter segment where Amazon has been expanding the last years.

Yes, recessions are hard. Hard for retailing companies like Amazon (that for sure will survive and will enter into another boom cycle when the next recession ends) and hard for Amazon investors, especially hard when the recession to come lifts the present Amazon's stock price delusion fog.

Summary

Amazon is a clear short, a bubble waiting to burst.

The "greater fool theory" is at work in Amazon: some investors are entering in Amazon because they have recognized a bubble and think they, even if the price is irrational, will sell their stocks to a "greatest fool" before the bubble burst.

Amazons Price to Earnings (PE) is near the maximum reached by the Nasdaq in the dot-com bubble peak in 2000. The business model transition followed by Amazon makes it more sensible to recessions than the earlier one which was centered on book selling. The last recession ended in 2009 and historically another recession occurs during the next 10 years, so time is running out for Amazon's investors.

We will come back to Amazon when the stock price is trailing below 300.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.