My dad is retired, so a family member introduced him to a friend who is a financial advisor, and the advisor looked over my dad’s portolio and gave him some free feedback on his stocks. Very generous of her (the advisor) to do that! But I am afraid I see it as a bit of a “Chicken Little” analysis. I thought I’d share her Amazon feedback, just so everyone can see what the (fairly extreme) bear side is thinking. I was amazed.
AMZN
the stock is ridiculously priced and has huge downside.
Amazon is trading at over 300x 2017 estimated earnings and over 150x 2018 estimated earnings
If I didn’t sell it, I would put in a stop loss at either $1196.25, which is the 50 day moving average and a key support level or $1035.25, which is the 200 day moving average and a key support level.
If you didn’t sell it, I think it has 75%+ downside, certainly below $300 a share, which would still give it a P/E of 40, if its earnings grow as much as is predicted in 2018.
The bolding is mine, but that part really took me aback. $300/share??? Nevertheless, the larger point is that, quite simply, it is inaccurate to value Amazon based on EPS. They have only ever shown a tiny profit margin…it’s not indicative of their actual earnings potential.
Just thought everyone would be interested in just how pessimistic the bear side can actually be. As I said, the extreme she expressed surprised me.
Bear
PS - Btw, as I type, the Dow, S&P, and Russell are all down on the year. The Nasdaq is up just over 1%. This strikes me as completely rational…I feel like the market is functioning just as it should. There’s so much rotting wood in the S&P, Dow, and for sure the Russell. The top weighted companies in the Nasdaq are Apple, Microsoft, Amazon, Facebook and Google. I would expect those companies to beat the market.
27 Likes
Wow.
I can totally understand the Tesla bear case, with their cash burn, demonstrated history of delays, and limited belief that their solar and storage businesses will amount to much of anything; but I don’t understand that level of a bear case in regards to Amazon. It would take some major piece of news (and probably something incapacitating Bezos) for Amazon to drop below $700/share again (with the current share count).
It seems to me that the key here is asset allocation. As your father is retired, having too large of a position in Amazon could be concerning. If he has a small position, as well as other more stable investments, it wouldn’t concern me too much.
Daryn
It’s really not to surprising to see financial advisors use a one-size-fits-all approach to stock investing such as EPS. It’s how they recommended GE in 2016:
GE receives a high score on earnings stability…Analysts expect earnings per share to jump 15% year over year to $1.73 in 2017. GE also receives high marks from a financial management standpoint…
https://www.barrons.com/articles/todays-top-5-stock-picks-pf…
General Electric Corporation is poised to remain an island of security and steady profits…
https://investorplace.com/2016/03/ge-stock-general-electric-…
And the list goes on and on, with more than one analyst touting GE’s participating in the IoT world or benefitting from the upcoming tax cuts. In case you haven’t been paying attention, GE has dropped in half during the past year.
Anyway, it shouldn’t be surprising that some analysts don’t understand Amazon’s growth strategy of reinvesting profits.
1 Like
that report may not be Bear pessimism but just the very limited tool set of many “financial advisors”. P/E is easy to figure out you only need 2 figures and a calculator
Then there is the “stop loss” bit, a sure way to get picked off by pros during a 10 minute computer caused meltdown. And support levels to the penny?
All of these are mechanical, needing little thought. I have always assumed most financial advisors are useful for neophytes helping them from making wild choices. like putting their life savings into an ostrich farm , etc.
But if they were good at stocks they would not need to waste time at “advising”, they would be "doing "
4 Likes
The real problem here is that it seems to me that this person is a highly technical (read: not fundamental) financial analyst.
There’s a great story from Charlie Munger on the Farnam Street blog I love to tell people about. You can read it here: https://www.fs.blog/2015/09/two-types-of-knowledge/
I frequently tell the apocryphal story about how Max Planck, after he won the Nobel Prize, went around Germany giving the same standard lecture on the new quantum mechanics.
Over time, his chauffeur memorized the lecture and said, “Would you mind, Professor Planck, because it’s so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur’s hat?” Planck said, “Why not?” And the chauffeur got up and gave this long lecture on quantum mechanics. After which a physics professor stood up and asked a perfectly ghastly question. The speaker said, “Well I’m surprised that in an advanced city like Munich I get such an elementary question. I’m going to ask my chauffeur to reply.”
While the ending is humorous, the point is: there are two types of knowledge. The chauffeur knowledge is obtained by reading books and following rules. The expert knowledge is obtained by weeks, months, years, and decades of doing – tinkering and weighing results.
While I agree that having lots in AMZN might not be prudent for a retiree, that’s not the justification you posed from the advisory. It simply has to do with PEs. This person doesn’t have skin in the game. I would wonder how he/she would feel if they tracked their advice via CAPS or with their own money (shorting AMZN, for instance).
Brian
29 Likes
Come on, Bear. I can totally see Amazon being at $300 per share. (After a 5 to 1 split, of course)
2 Likes
-not recommending a stock is not the same as shorting
-agree with the fundamental point - the person doing the analysis is using one tool in the kit without understanding how other dynamics can work which implies that the advisor isn’t well versed in statement analysis anyway, which in turn suggest - no expertise exists.
While I’m biased, and with due respect to those of you few who actually do combine fundamental analysis with TA to determine entry/exit points, but the support level crud references only confirms this (otherwise, they would just recommend a straight sale).
Course, everybody knows that Amazon would actually SUCK if 1) they didn’t emphasize cash flow over earnings (and you can only know this by staring at the cash flow statement - I didn’t do this for YEARS and YEARS and YEARS cause I was stupid), and 2) they didn’t have a monopoly on eyeballs that would be darn near impossible to circumvent (which makes their total addressable market incredibly huge unless they get ambitions that are too grand and try to do too much - I’m talking about the dumb Whole Foods acquisition here IMO) unless a brand new technology is invented. Course, those things ARE true…and someone who works in this field who didn’t know the later part would not be well-informed cause everybody knows Amazon has this advantage. But the monopoly part vs making money part really trips many folks up - so I sympathize with this person who is nevertheless an idiot but unfortunately doesn’t know it.
So an expert opinion? No.
An uninformed one.
(course, this doesn’t mean this expert is not a good advisor/analyst/whatever, cause then you’d need some opinions on a buy to make sense of it all, but you’d have to harbor doubts.)
just my opinion
3 Likes
<<<I’m talking about the dumb Whole Foods acquisition here IMO>>>
Along with cutting prices at Whole Foods, Amazon is now offering 2 hour grocery delivery for anyone with a Prime membership in any city where a Whole Foods is. Rolling out in 4 cities as a trial run. I have a Whole Foods in my city, but not one of the lucky cities to go first.
Amazon has new technology. An example, humanless retail store in Seattle that Amazon will spread the technology to Whole Foods at some point and become the most efficient grocer in the world.
Amazon has scale of delivery that no one in the world has or will have, except perhaps Alibaba, but they do not compete in the U.S.
Amazon will be doing drone deliveries. May not 5 years out or more, but in some cities, it is already here on a trial basis.
Amazon knows what they are doing. They take the scale they have, the technological innovation and advantages they have in regard, and proactively and practically move into businesses where they can use it to disrupt markets. Whole Foods is not a pie in the sky acquisition with hubris. If they wanted that they could have bought Kroger.
Tinker
6 Likes
"Amazon knows what they are doing. They take the scale they have, the technological innovation and advantages they have in regard, and proactively and practically move into businesses where they can use it to disrupt markets. Whole Foods is not a pie in the sky acquisition with hubris. If they wanted that they could have bought Kroger.
Tinker"
Gene Munster predicts AMZN buys TGT this year.
https://www.streetinsider.com/Analyst+Comments/Amazon+%28AMZ…
Rob
Target is in huge need of an infusion or something.
Target use to be a great store to shop in. I worked in Target in high school. The kids use to love to go to Target. We would play 2 square in the aisles, go through the toys, look through the electronics, books, DVDs, etc.
Now the stores are practically bare (much better than Sears, thank you, which was left to rot and die as the primary shareholder wants the company to fail as he is a financial genius who profits on the real estate and other things). With the demise of DVDs, which was the last thing holding the stores up, Target got into groceries.
I still shop at Target for necessities, but I have seen it happen year by year. It is just not the same store anymore. If Amazon does buy it, they cannot do any worse, and hopefully they could rejuvenate Target as a cutting edge leading retailer.
Tinker
1 Like
Target did not help itself with advocating the bathroom issue. Business should veer away from controversy. I know 2 families that now boycott them.
It has been a couple of years since I stepped into one, and see no reason to do so now.
4 Likes
amzn should spend their capital on high ROI, lower Capital expenditure projects
like AWS
Whole Foods was ultimately a horrible acquisition IMO - the chain struggled before it was acquired, and now it has unlimited resources to compete in an absolute cut-throat industry with low returns on capital and uncertain returns. Course, in the grand scheme of life nobody cares cause AMZN’s potential is so extreme but it is dumb moves like this that give anti-AMZN business people hope.
my personal opinion
2 Likes
GreenMartianX-
Not sure if this has been covered before, but I highly recommend reading this piece on the WFM acquisition, which I also thought was odd at the time:
https://stratechery.com/2017/amazons-new-customer/
A quick review of the salient points:
- Amazon’s core business is The Everything Store
That said, the company will make most of its money for investors on the solutions it builds for The Everything Store
-
Investments in fulfillment centers only made since b/c it helped The Everything Store. However, once it was built out, why not offer it up to others → highly-profitable Fulfillment by Amazon
-
Investments in web services only made since over a decade ago because the company was suffering from bottle necks with the IT department. However, once the tools had been build out for all of Amazon’s nascent departments to use the Amazon’s cloud, why not offer it up to others → Ridiculously profitable AWS
-
Investments in your own delivery network are re-donk-ulously expensive. But since you have a guaranteed customer in The Everything Store, why not build out your own delivery company. While you’re at it, offer it up at a discount to UPS and FedEx and make a smaller margin on huge volume → Amazon Delivery
-
Who would want to come up with their very own healthcare system? Only a company that employs a ridiculously huge number of people (and is very innovative). Amazon has 566,000 employees, and likely many more over the next 10 years. The cost of healthcare is mammoth to them. So why not partner with Berkshire and JPMorgan Chase and come up with your own solution. And while you’re at it, why not offer it to all Americans once perfected → Healthcare by Amazerkshire Morgan
Ok, so those last two have yet to come to fruition. But you get the point. Amazon can afford to build these huge solutions because they have a guaranteed customer: The Everything Store.
But there’s one part of retail – the biggest and most reliable one by far that The Everything Store doesn’t serve: groceries. Whole Foods is not a play on growing Whole Foods → It’s an insurance policy. Amazon needs a guaranteed customer for its growing grocery business. In Whole Foods, it got that customer, and it now has the justification and safety to build out its infrastructure to meet the needs of far more than Whole Foods.
Just my two cents, we’ll see how it plays out,
Brian
Long AMZN
45 Likes
thanks for the link
if it matters, the author of that piece is based in Taiwan and had jobs that focused on “strategy, developer relations, and marketing” which may or may not make him qualified as an analysis of financial decision making. However, given that he came to the topic with a conclusion in hand, my disagreement would come from an obvious place: I followed WFM and evidently he didn’t.
The best business models in the world, the ones that ultimately make the most money, tend to exclusively focus on high returns on capital. The grocery business can be a fertile source of cash flow but it requires continual investment, and AMZN willingly engaged in this business when they didn’t have to do so (diworseification). Yes, I’ve read all the stories about how wonderful this is, how this combination would cause sea-change in the industry, but Amazon ALREADY has a guaranteed customer - the idea that it needs an ‘insurance’ policy implies they are not capable elsewhere - and they already are.
But as noted, it doesn’t matter cause Amazon can do a lot of things - but their biggest challenge perhaps will be how to allocate their resources. I think WFM was a particular foolish one, and grand pronouncements that is was already a success ignores that reality - as you said - has yet to play out. We’ll see if Amazon even reveals to us how they are doing with it, but WFM was struggling mightily with sales before it was acquired.
I just think it was stupid to do when they could have done a ton of other things.
P.S.
A lot of companies have these grand pronouncements - but the best ones inevitably focus. My only point.
4 Likes
When I worked as a management consultant I had a supermarket chain for a client. I was astounded how with razor thin gross margins they could get 30% return on capital. The chief buyer (the most important job in the business) made it clear to me when he said that he had to sell the merchandise three times before paying for it. If he got 30 days credit the merchandise had to be sold in ten days or less. And if you can’t sell it you put it on sale. Slow moving merchandise is what kill the business.
Imagine WFM as a market instead of as a grocer with suppliers taking the risk and WFM collecting a commission – the Amazon model.
Sold by Fresh Veggies and Fulfilled by WFM.
About Fulfilled by WFM
Items “Fulfilled by WFM” are offered by a third-party seller, but shipped from an Amazon/WFM Fulfillment Center to you.
Don’t sell Bezos short!
Denny Schlesinger
13 Likes
cc, with due respect, you can imagine all you want, but 13b went out the door, and so far Amazon is helpfully providing almost ZERO disclosure about WFM in their statements (other than 1.3b in sales and all of 21m in operating income). Being the #1 e-tailer in the US and developing the AWS biz is truly monumental, but it doesn’t make them qualified to do everything better than everyone else. They aren’t going to suddenly transform WFM into an e-tailer…and most people believe AWS makes up the majority of Amazon’s value these days anyway…take off the rose colored glasses…
4 Likes
…take off the rose colored glasses…
Up to here your reply was fine.
Denny Schlesinger
2 Likes
sorry denny
how about - i think you are being unduly optimistic about this specific capital allocation move, but that is just my little opinion - and the market doesn’t care anyway…
even Buffett had Dexter Shoe
1 Like
Thanks GreenMartianX!
I confess that I’m impressed by Bezos. One of the things that impresses me is that he tries things, sometimes makes mistakes in which case he aborts the project. He has yet to abort the WFM project.
Amazon is about redesigning or redefining retail, there is no reason it can’t apply to groceries. The scenario I painted is the application of the Amazon method to groceries. Just copy/edit/paste! 
Denny Schlesinger
1 Like