Sometimes holding a credit card—especially a brand new one—can provide as much of a rush, buzz, and hangover as a shot glass (or 2, or 3) of tequila. Most of us have a memory (or 2 or 3) of the stupid things we did after a few drinks too many (only in college, of course).
As the buzz gets going, the happy thoughts come and soon every decision, encounter, and idea gets more and more attractive as the “beer-goggle” decisions kick in. Then, somewhere after midnight, we feel those first warning signs of slow speech, balance issues, and thoughts of pending regret. The next morning, of course, we wake up feeling sick.
In some ways, the debt cycle and a night of over-drinking are one and the same…
Well, this fiscal quarter, that ol’ sick feeling is all over the retail sector (as well as the oil, media, telecom, and others). Why? Because it got a bit too drunk on easy money, be it from direct bank loans, PE injections, or VC body shots. But the head of this debt snake is the same: a central bank that cranked rates to near zero for 100+ months.
And please remember this: behind every recession, bankruptcy or bond market crash is a lender standing in the corner, head down, avoiding eye-contact and fidgeting with his hands. Once the life of the party, that credit jock is now like the hated bartender who poured one too many the night before.
In short, easy money is dangerous: it makes us do crazy things. For every nation, industry, sector, business, family, or individual who lives off debt rather than productivity, the end result (despite a currently rising market) is the same: eventually, an “oh-$#!T” moment is coming. US Debt.
And it’s coming. At the sovereign level, our country’s deficit has ballooned to $20T with only a 1.25% annualized GDP to show for it—kind of like putting a Ferrari on your Visa Card despite a bus-boy’s salary. When the bill comes due at month end, you won’t have the “productivity” (i.e. money) to pay for that sweet ride. Still, driving a Ferrari is fun, and easy credit is seductive.
Look at all those happy-go-lucky retailers who got drunk on it: Remember Circuit City or Linens’n Things in the last recession? Today, we see a new class of retailers driving on debt-induced beer goggles: Payless and Sports Authority are driving straight and fast into Chapter 11, while other shops like Macy’s, Nieman Marcus, Claires, J Crew, Subway, Sears, JC Penny and a long list of others are either teetering on debt or heading directly for the bathroom with a hand over their mouths and earnings reports.
Look around you and you’ll see it: empty parking spaces abound and retailers are in trouble. The debt cycle is rearing its head, and its “hangover-look” is as clear as its eyes (and balance sheets) are red.
This combination of debt-soaked retailers and increasingly debt soaked consumers who are spending less and suffering more is not good.
But some may chalk this retail correction up to ecommerce and the Darwinian Amazon.com effect of a world just transitioning to digital. There’s no doubt Amazon has been like a submarine menace to the retail juggernauts of yesterday, but Amazon itself is its own bizarre bit of crazy. As they run around underselling every industry from diapers to books to toothpaste in a blitzkrieg price war of online everything, they’ve overlooked one key concept amidst all the job-killing they’ve done from IBM to Borders Books, namely: profit.
It’s fascinating to consider Amazon’s massive scale, sales growth, and debt levels over the last many years. All of it is growing beyond measure—yet despite a $450B market cap, a near doubling of revenues from $80B to $140B, awe-inspiring stock price climbs, and $17B of investments into its core business model, AMZN has only earned $3B of profits in the last 3 years.
But let’s not be too harsh on the folks at Amazon. In the last ten years, the online retailer has gained over 1,900% in value over the same time frame that Sears went from being worth $28B to $1B—a 96% decrease. (JC Penny saw an 86% decrease). In short, the online wave has swamped a lot of unprepared retailers, whose collective revenues are equal to about 60% of their 2006 totals.
AMZN is currently trading at a 187 PE ratio, a 22.8 Price to Book ratio, and a 27 Price to Cash Flow (against an S&P respectively at 21.3, 3, and 13). In sum: this is an overheated valuation by any measure. And though this company is in no threat of a demise, like so many companies in the last bubble (and many still operating today –from Microsoft, Cisco, Yahoo, Juniper, and Lucent to Global Crossing or Commerce One), I am looking forward to shorting this stock when the signals say so.
Growth stock cheerleaders who ignore balance sheets will consider such words blasphemous—although many of them were not trading in April of 2000, when I saw VC driven revenues push unicorn stocks to nosebleed highs before crashing. But surely AMZN is no VC-driven unicorn. Or is it?
The recent earnings report for Q1 beat market estimates amid a fanfare of CNBC confetti. But this so called “positive report” was based on a tax-rate maneuver, not a revenue gain. In fact, for those familiar with GAAP accounting, earnings for Amazon dropped 11% from $2.24 to $1.99 per share, pre-tax.
And remember, AMZN has two heads: 1) the ecommerce play and 2) cloud services—or AWS. During Q1 of 2016, the ecommerce head showed an operating income of $467M; this year that number fell to $115M, a 75% down move. So if ecommerce isn’t driving income, certainly the cloud must be, right? But even if you consider AWS’s net income of $2.4B LTM—you’d have to give that figure a 40X multiple to give AWS a $100B market cap, which would mean its ecommerce head would have to be worth $350B to justify AMZN’s combined $450B market cap?
But the math just doesn’t work…By the way, I haven’t seen multiples or math like this since, well 2000. Remember 2000? This puppy feels like a bubble stock. AMZN’s e-commerce model spends every penny of income on distribution centers, delivery trucks, and even drones. But still no profits.
And as for the AWS cloud-driven revenue model, one would only pay for AMZN at these “above-the-cloud” valuations if they believed AMZN owned the cloud, which they don’t. Do you really think the guys running Oracle, Microsoft, or Google are lacking in competitive spirit? There are no barriers to entry, patents, or brand-power to stop any of these Ellison-types from a war in the clouds. Ellison blasts Amazon.
In fact, Microsoft is eyeing the cloud as the future of its business model and Ellison is on a terror to cut cloud pricing by 90%. And as for AWS’s $13B revenues—much of that is from gobbling up other unicorns in Silicon Valley, which means AMZN’s cloud revenues are coming from VC funding, not real demand/income. Oops.
Again: to me this just means that behind the hype, the market cap, and the “financial press”—what you really have is a real (and perhaps really good) but over-valued business that makes no profits nor dividends and reminds this dot.com veteran of 2000-like hysteria where I saw growth chasers get fat, and then slaughtered.
Speaking of fat. Let’s consider Tesla. Perhaps some of us feel the Tesla Model 3 is going to be the next Ford Model T. Model 3, An Epic Fail? Anything’s possible. But a careful and historical comparison of Henry Ford’s conservative balance sheet and candor vs. Elon Musk’s debt and hype might dispel some delusions that a new generation of IPO-backed technology has supplanted good ol fashion common sense.
Barclays recently downgraded Tesla to a sell despite their admission that the stock keeps skyrocketing on growth prospects rather than actual value. Although the stock is now trading around recent $300+ highs, Barclays thinks this cocktail is more accurately priced at $165. Even Goldman, the fat goose who laid the golden Tesla IPO egg, downgraded its own chickadee to a $185 price target in February.
And yet the drunk drivers on Wall Street continue to believe that a company already up 40+% this year is a sober bet. Whewww. Have investors forgotten that Tesla loses more than $4,000 on every car it sells, burns through more than $350M per quarter, trades higher than Ford yet sells only 50,000 cars a year against Ford’s 9 million+/year and blows through debt and FCF faster than a frat-boy can crush a Coors Light? In other words, a hangover seems nigh. Tesla.
Ahhhh. But who needs these pesky little facts. After all, Tesla bulls see Musk as a disrupter, a hipster, an innovator. He’s a visionary with battery costs down to $100/kwh, leading the way in autonomous driving and poised to be for cars what the iPhone is to phone calls. In short, the true-believers keep drinking this beer because the Tesla Tinker-Bell party never dies, as long as investors– like Peter Pan—just “believe, believe, believe!”
I guess if you invest the way Peter Pan dreams, then the current Tesla price is good enough. Ironically, even Elon Musk admits the stock is too high, way too high. He’s no Peter Pan. I admire him. But founder views aside, it might be worth noting that for Tesla’s balance sheet to justify these PE ratios, prices, and dot.com-bubble-like drunken binges of hope over reality, Tesla would effectively have to be the only car maker in the world to think about batteries.
But it’s not. Legacy automakers know how to design effective batteries too. Nor is Tesla the only one thinking about autonomous driving, but if you actually expect to see highways full of sleeping drivers in the next few quarters, you may find Tesla’s stock price to be the least of your illusions. Finally, for Tesla to become the iPhone of the auto world, then some of the smart and equally hip (though less fashionable) geniuses at BMW, GM et al might want to buy you some coffee.
As someone who remembers trading the NASDAQ bubble of 2000 and calling my institutional sales rep (at a certain not-to-be-named prime brokerage house), where 99.9% of every analyst report was a “buy” only minutes before every order was a panicked “sell,” I would take Barclays’—and even Goldman’s—advice more seriously than Musk’s grin. He’s an innovator, a dreamer….He’s admirable. But there are so many unsung and unrecognized others with equal if not greater qualities who would still support the dream without supporting this stock price.
Are AMZN and TSLA on your buy list?