Bad Calls from the Past: Amazon vs Blackberry
An inditement of the old world of financial journalism.
There is a world of difference between making a “bull call” on something I own and something I don’t. My Substack would probably be more popular if I constantly inundated readers with ideas I have no real interest in; no money in. As a matter of fact, this is what I love about investing. In a world of "hot takes,” I cant afford to have ill-thought-out beliefs. The fact that we investors have to put our money behind our ideas means I tend to listen to investors when they talk; particularly when its their money on the line. Our incentive is simple: Be right.
Journalists, on the other hand, operate with a whole other set of incentives; and financial journalists are no different. Mix those misplaced motives with the questionable source material used by many financial journalists (i.e: economists and financial analysts), and you frequently end up with some dumb ideas. Now, I don’t want to go too far and wrap all financial media into this bucket, but the fact remains that people endow the written and published word with far more credit than it deserves.
So today is a fun day.
Today we’re basically going to roll back the clock on some investing fails from the past, and crap all over the thought process behind them - now that we know they’re fails. Usually, I dislike this sort of monday-morning-quarterbacking, but I just can’t help myself sometimes. Theres too much garbage thinking our world, and today I woke up with a can of gasoline and a zippo and just decided to start burning shit.
This will hopefully go on to be an enjoyable and interesting write-up. My hope is to gain a little perspective on the real value of all the many perspectives that are out there.
#1: Blackberry vs Amazon: Why PEG’s are Bullshit, and why “Value” in Tech is a Dangerous Idea.
AMZN Return since article publication date = 1,693%
RIM (BB) Return since article publication date = -93% (minus, thats a minus 93%)
Let me concede this; had I been investing back in 2010, I may have actually avoided Amazon myself. I’m reminded of something Buffett said a few years back:
“I’ve watched Amazon from the start, and what Jeff Bezos has done is something close to a miracle … the problem is, when I think something is going to be a miracle, I tend not to bet on it.”
I don’t bet on miracles either, and so there is something to be said for this idea that it was not obvious to a rational investor at the time that Amazon would become the monster that it is today. But this article is a classic example of a bastardization of true value investing; particularly through its inclusion of PEG ratios.
Lets begin:
Whenever a stock can potentially drop 50% and still be considered overvalued, that’s when you know the stock is a bubble. Amazon (AMZN) far surpassed bubble territory ages ago but investors still continue to plunge billions of dollars into the company. If the stock were to crash to $80 a share today from $164, it would still be trading at a significantly richer valuation than Google (GOOG), Apple (AAPL) or even Research in Motion (RIMM).
While Amazon continues to execute at a very high level – yesterday it reported better than expected sales growth of 39% and earnings growth of 16% — the stock still trades at a very lofty 67 P/E ratio. That’s more than triple Apple’s 20.1 P/E ratio, or Google’s 24.6 P/E ratio. Even more striking is that the company trades at 2.31 times its expected 5-year growth rate, which indicates that the stock has gotten way ahead of itself. Ideally, a company should trade at no more than a 1:1 PEG ratio unless the company has a consistently proven track record (like Apple) of far exceeding analyst expectations.
By comparison, Apple only trades at 1.11 times its 5-year expected growth rate, Google at 1.23 times and Research in Motion at only half its expected growth rate. Yet, all of these companies are expected to grow at more or less the same level. Only Amazon trades at a valuation that far exceeds any semblance of reality.
Analysts expect Amazon to report earnings of roughly $2.59 in earnings per share on $33.3 billion in revenue in fiscal 2010 compared to $3.57 in EPS on $41.63 billion in revenue for fiscal 2011. Based on these estimates, the company is expected to grow at a roughly 37.8% pace next year. Yet, the stock trades nearly 46 times next year’s earnings. While Amazon is trading at only a slight premium to its 12-month expected growth rate, the loftiness in its valuation arises out of three distinct issues.
This is why when I hear “perspective growth rate” or “average analyst growth estimates” I flinch. Moreover, this “take” illustrates the danger in viewing companies only through a quantitative lens. Sure, if you’re “cigar butt” investing then maybe the numbers really are all that matter, but even then I think one needs to understand the business. And i’m a value guy! I mean I look at earnings multiples and balance sheets - you better believe that.
At no point in this article does the author discuss the business. Instead, the focus is on what “analysts expect” - I couldn’t think of a less important variable than that. Not to say that earnings growth is some irrelevant metric; it matters, its just impossible to accurately predict. Usually, as stocks rise, so do the earnings growth expectations; IN THAT ORDER. Usually, sentiment follows price. Lord knows how these 5-Year EPS growth stats are arrived at, but its a little less accurate that licking your finger and predicting rainfall in 2030.
I own Amazon, but I didn’t buy it in 2010, thats for sure. Even still, looking back at their 10ks from the years previous to this article we can see that AWS was well under way:
(from the 2009 annual report)
“Amazon Web Services continued its rapid pace of innovation, launching many new services and features, including the Amazon Relational Database Service, Virtual Private Cloud, Elastic MapReduce, High-Memory EC2 Instances, Reserved and Spot Instances, Streaming for Amazon CloudFront, and Versioning for Amazon S3. AWS also continued to expand its global footprint to include additional services in the EU, a new Northern California Region and plans for a presence in the Asia-Pacific Region in 2010. The continued innovation and track record for operational performance helped AWS add more customers in 2009 than ever before, including many large enterprise customers.”
Does our fortune telling journalists (who’s portfolio performance we can’t see) mention AWS? Nope. He goes on to compare Amazon to Apple (which of course also performed very well over the same period).
First, when looking farther out, analysts are modeling for a more tempered 25% growth rate for Amazon over the next five years. Based on this expectation, the stock shouldn’t be trading at a significantly higher premium than 25 times next year’s earnings. This is exactly why, though Apple is expected to grow at a pace of 35% in 2011, the company trades at only 15 times 2011 earnings. Analysts expect Apple to grow at a pace of 19.2% over the next 5-year period and as a result, it trades at a fair 20.1 trailing P/E ratio.
Which brings us to our second, and more important problem for Amazon’s current lofty valuation. Why should someone pay 46 times next year’s earnings for Amazon at when they could buy Apple at mere 15 times next year’s earnings, Google at 19 times or Research in Motion at only 8 times next year’s earnings? Why should Amazon be given a more lofty valuation when analysts not only expect roughly the same out of Apple over the coming five years, but the stock trades at only a third of Amazon’s outlandish valuation?
It absolutely makes no sense, especially when one considers the fact that Amazon has far underperformed on both the top and bottom line when compared to Apple. While companies are valued based on future expectations, there’s something to be said about how a company is actually performing. Especially when what is expected out of all four of these companies is more or less the same.
Notice how the author cites “future expectations” in paragraph 1:
“analysts are modeling for a more tempered 25% growth rate for Amazon over the next five years”
And then asks a series of questions which he then doesn’t bother to even try to answer:
“Why should Amazon be given a more lofty valuation when analysts not only expect roughly the same out of Apple over the coming five years, but the stock trades at only a third of Amazon’s outlandish valuation?”
He goes on to make claims about how revenue matters more than earnings because;
“It’s much harder to make money than to cut costs, and sophisticated investors know this.”
If you sell dollar bills for 90 cents then you are definitely going to grow your top line, but good look turning a profit. The irony is that Amazon was improving its business and growing free cash flow rapidly. Here’s a link to the Amazon 2009 annual report, but i’ll just summarize what the business was doing that might possibly explain the “lofty” valuation.
In 2009 Amazon was growing sales by 28% and free cash flow by 114%, expanding into 21 fresh product categories from baby gear in France to automotive in Japan, building out Prime with 50% more ready-to-ship items and a surge in worldwide memberships, bringing in a record 1.9 million active third-party sellers whose goods made up 30 % of all units sold, and growing its technological reach by rolling out flagship AWS offerings such as RDS, VPC, and Elastic MapReduce while adding new regions in Northern California and Europe; at the same time it was deepening its retail moat through the Zappos acquisition and an apparel push that uploaded millions of images, and scaling digital content with the Kindle Store leaping from 250 k to 460 k titles and shipping devices to 120 countries.
These guys were busy, and building out the plumbing for the future of computing; the cloud. They were way ahead on that. Does that mean “only an idiot could miss it?” of course not! But that does perhaps explain the valuation.
I’m not done, lets take a look at the final nail in the coffin. The big prediction! The sexy confident analyst who can see the future and is willing to make BIG CLAIMS:
The bottom line is this: Amazon trades at more than three times Apple’s current valuation, eight times RIM’s valuation and just about two and a half times Google’s valuation. This is simply way too high. Nothing in the company’s performance supports the current price level. When RIM was trading at $150 a share, sophisticated investors knew the stock was a bubble. This case is no different. There is no matter of ‘if’ in this analysis. It’s a matter of ‘when.’ Amazon will lose 50% of its value over the coming years. At $150-$160 a share, investors are flirting with financial suicide.
Not a matter of “if” he says. No, its a matter of “when.”
Lets take a look at Amazons stock price returns going back to 2010:
Amazon, the expensive company is up over 1,600% since that article was published and did eventually decline almost 50%…in 2022 (12 years later).
I’m shitting on this guy a lot, but really the lesson is the tunnel-vision thinking and what that teaches investors. I can’t understand stock prices and valuations without the context of the business. After all, those other numbers are all reflections of that business.
The insistence that BlackBerry is “cheap” implies that these two companies are in the same business and they’re 1000% not in the same business. I can compare Uber to Google and anyone with half a brain will know that it makes no sense to do that. Visa trades for double the earnings multiple that Eagle Materials does, but Eagles margins, capital needs, ROE, and entire growth trajectory is nothing like Visa. You can’t compare them.
But this is the sort of fellow who would claim “value investor” when really he’s no better than a day trader in my mind. Yes, when we buy companies we’re purchasing a legal right to their future earnings/cash flow. But really we’re investing in a business.
I would never fault an investor for “failing to buy” a business that turned out to be great. Thats not the issue. My gripe is with the reasoning (or lack thereof) with which he makes the decision.
People do this today more than ever. Why? Because while AI winners and losers have yet to be chosen, people can always make a buck pretending they know the future.
Here’s some irony: The “oracle” of Omaha got great returns by not bothering with predictions.
Oh and this guys next article is from 2011 and titled: “Netflix: How its a bubble”
Can’t wait.
…and one more thing, take a look at this guy’s profile:
Occupation: “Day Trader and Writer”
Talk to you later.