BEWARE: This Tech Darling is Due for a Fall - Vivek Kaul's Diary
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BEWARE: This Tech Darling is Due for a Fall

Jan 15, 2016

27

Into each life some rain must fall

But too much is falling in mine

Into each heart some tears must fall

But someday the sun will shine.

- Into Each Life Some Rain Must Fall, The Ink Spots

Paris, France

Bad stuff happens. There is no getting around it. No denying it. No pretending it isn't so.

The only real question is: Where are you when it happens?

It can be fun to sail out far from shore...until you realise you forgot to pack the food hamper.

How much better it would be to have understood your girlfriend's meth addiction - before you married her.

And what a thrill you get from watching your go-go stocks rise like rockets...but you don't want to be standing beneath them when they start to fall on your head.


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The River of No Returns

The Dow shed another 365 points yesterday - for a more than 2% fall.

'Stocks take a beating as alarm grows,' announces a Wall Street Journal headline.

Between just two companies - Amazon and Google (now called Alphabet) - $100 billion of fantasy capital has been lost since the beginning of the year.

Fifteen years ago, we tagged Amazon as the 'river of no returns'. Since then, the share price has soared. The company has flourished...and we have looked like an idiot.

On paper, the company is worth a fortune. CEO Jeff Bezos has shown the world what a genius he is. He has constantly reinvested Amazon's cash flow to gain market share and garner headlines.

But wait... The bankruptcy courts are full of geniuses. And being able to sell the public your story is not the same as being able to sell a product at a profit and return earnings to the shareholders.

Despite all the water under the bridge, as near as we can tell, Amazon is still the river of no returns.

Where's the Money?

In a bull market, investors are content with hope, hype, and earnings tomorrow. They are patient and don't ask too many questions.

But in bear market, hope goes into hiding, patience fades...and the question marks come out in the open.

'Where's the money?' they ask. Investors want cash in hand, now. They want dividends. They want protection from tides and full disclosure of the risks.

Even after a 16% haircut over the last two and a half weeks, Amazon is still trading at over 830 times net income.

And this is no 'latest technology' play headed by a tech wizard.

Bezos only had limited exposure to tech before founding Amazon. And he has no real background in retailing either. He is a Wall Street man. And Amazon is no technology play. It's a financial play.

Bezos worked for banks, investments firms, and hedge funds before launching into ecommerce. He started Amazon in 1994. The company was founded on technology and market conditions as they existed back then. The old river has been silting up ever since.

Let's see... Amazon says it made $328 million last year. It's valued in the stock market at $495 billion. The stock sold for $581 yesterday.

Hmmm... As a mature company, it should be valued at about 15 times earnings. Since Bezos is such a genius, we'll stretch and give him a price-to-earnings ratio of 20. That makes the company worth about $6.5 billion and gives us a target price per share of about $14.

About 10 years ago, we guessed that Amazon was a 'decent $10 stock'. The numbers say we were just about right.

But it all depends on where you are when you find out.

If you are comfortably in gold, cash, and real estate, you can look on Wall Street's decline like a neighbour watching a police raid on a noisy party.

But if your portfolio is full of Amazon shares, we advise you to duck out the back door.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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