by David Stockman, David Stockman’s Contra Corner:
Wall Street has now truly jumped the shark—the one jockeyed by Jeff Bezos.
Last night Amazon reported a whopping 41% plunge in free cash flow for the March 2018 LTM period compared to prior year. Yet it was promptly rewarded by a $50 billion surge in market cap—-with $10 billion of that going to the guy riding topside on the Great White Shark of Bubble Finance.
That’s right. Amazon’s relatively meager operating free cash flow for the March 2017 LTM period had printed at $9.0 billion, but in the most recent 12 months the number has slithered all the way down to just $5.3 billion.
And that’s where the real insanity begins. A year ago Amazon’s market cap towered at $425 billion—meaning that it was being valued at a downright frisky 47X free cash flow. But fast forward a year and we get $780 billion in the market cap column this morning and 146X for the free cash flow multiple.
Folks, a company selling distilled water from the Fountain of Youth can’t be worth 146X free cash flow, but don’t tell the giddy lunatics on Wall Street because they are apparently just getting started.
Already at the crack of dawn SunTrust was out with a $1900 price target—meaning an implied market cap of $970 billion and 180X on the free cash flow multiple.
At this point, of course, you could say who’s counting and be done with it. But actually it’s worse—-and for both Amazon and the US economy.
That’s because Amazon is both the leading edge of the most fantastic ever bubble on Wall Street and also a poster boy for the manner in which Bubble Finance is hammering growth, jobs, incomes and economic vitality on main street.
Moreover, soon enough a collapsing Wall Street bubble will bring the already deeply impaired main street economy to its knees. So Amazon is a double-destroyer.
In this context, Bezos e-Commerce juggernaut racked up $174 billion of sales during the March LTM period, which represented a massive $45 billion or 35% gain over prior year (both figures exclude AWS). By way of comparison, that one-year gain is nearly double Macy’s total annual sales!
Even when you adjust for the Whole Foods acquisition that was not in the 2017 LTM numbers, the sales gain was about $35 billion or 27%.
Either way, the robo-traders got damn excited, scooping up AMZN’s shares hand-over-fist on the back of its “great sales momentum”. But as we said yesterday, headline reading algos don’t get far below the surface, and in this case they didn’t even break the skin.
Fully 96% of Amazon’s $5.0 billion of LTM operating income was accounted for by its cloud services business (AWS).
The e-Commerce juggernaut, by contrast, posted just $188 million of LTM operating income, which am0unts to, well, 0.1% of sales on a computational basis. But we’d round that to zero—especially because Amazon’s e-Commerce business was already almost there in the year ago period when its margin on sales came in a tad higher at 0.6%!
Needless to say, AWS has nothing to do with e-Commerce, and, instead, is in the brute force, capital-intensive server farm business. As the leader of a rapidly growing pack of cloud farmers, AWS racked up a 44% year-on-year sales gain.
Even then, the world can only migrate from desk tops and discrete devices to the cloud once—so there is no conceivable way that current growth rates can be sustained or should be capitalized in perpetuity.
Still, give AWS the benefit of the doubt and value it at Microsoft’s red hot multiple of 50X, which we don’t think makes much sense, either. After all, it’s a 42-year old company that has posted essentially zero earnings growth over the last 7 years and much volatility of results.
In any event, at Microsoft’s elevated multiple of the moment, the cloud business is worth $200 billion. That reflects 50X the $4 billion of LTM net income attributable to AWS, which happens to be 100% of AMZN’s net income because e-Commerce earned zero after attributable interest and taxes.
Needless to say, that means the loony bins down on Wall Street are valuing Bezos’ profit-free e-Commerce monster at $580 billion. And that goes right to our double-destroyer point.
Amazon is undoubtedly one of the craziest momo stocks of all-time—meaning that there is $300 billion or even more of bottled air lodged in the implied $580 billion value of e-Commerce. That’s because the vast bulk of Amazon is in the GDP business—-that is, the moving and storage and delivery of good and services.