Reagan-era Budget Director David Stockman rocked markets Monday with a note to clients calling Amazon.com Inc. (Nasdaq: AMZN) a bubble, saying the company is "set for a spectacular collapse."
Then he went on to say that a tech crash is "imminent," and that the company most at risk is Amazon because it hasn't invented anything "explosively new like the iPhone or personal computer."
Amazon is not a Reagan-era company, so measuring it today using criteria that applied 35 years ago completely misses the point - not to mention the profit potential.
Stockman has obviously had a long and distinguished career, and I respect his analysis. But I cannot disagree more vehemently when it comes to Amazon...
Here Are Three Things Stockman's Missing
1) The markets themselves have changed: Manufacturing went out the door years ago. Companies no longer need to invent gadgets to change the world. In fact, many of the world's most profitable changes are now completely code-driven and worth hundreds of billions of dollars.
This is very different from "It's the economy, stupid" - a phrase coined by James Carville, Bill Clinton's presidential campaign strategist, more than two decades ago, when e-commerce was but a fledgling undertaking and manufacturing acumen still ruled the world. Companies like Sears and Kodak were actually good investments, and the Internet was nothing more than a misunderstood technology.
Now, e-commerce accounts for $385 billion worldwide in 2016 - 43% of which passed through Amazon, according to Business Insider. By 2020, the world total will stand at $632 billion annually... or more.
That means there is an entirely different set of calculations that should be applied when it comes to a company like Amazon.
For example, most of Stockman's reasoning is based on the fact that Amazon has a price-to-earnings (P/E) ratio of 187 as I type, and he very convincingly makes the point that "the numbers don't add up."
Yet, P/E ratios, for example, have no predictive value whatsoever. That little bombshell is according to a wide variety of recent studies from the likes of Morgan Stanley, STAR Capital, Global Market Valuation Research, and Yale Economics, in case you're wondering.
Stockman also goes on to say that "central banks" have created false growth through excessive, cheap money, and that traders have driven prices higher based on nothing more than momentum.
If you're along for the ride with appropriate risk management in place - just in case the markets have other ideas - do you really care how the profits you're harvesting are created?
Amazon has risen 47% since last January, another time Stockman called it a bubble, citing many of the same reasons. What's more, the stock has risen 2,420% since the Great Recession, from a November 2008 low of $34.68 a share.
Anybody who went to the sidelines at the time because of "false growth" or similar advice missed every single penny of that rise.
2) Stockman fails to recognize growth potential he doesn't understand: He says that 91% of Amazon's revenue comes from "sourcing, moving, storing, and delivering goods," which is correct. However, in the same breath he fails to recognize the growth in cloud computing and Big Data that drives Amazon's profits.
Many of today's top tech companies will never make "stuff" in the classic sense of the term, and certainly not in such a way that they're countable using Reagan-era logic.
Not to pick on Stockman, but using his line of thinking means you wouldn't have invested in Facebook Inc. (Nasdaq: FB), Alphabet Inc. (Nasdaq: GOOGL), or even Microsoft Corp. (Nasdaq: MSFT), all of which deal in profits derived from bits and bytes.
Investing $10,000 in each when they held their IPOs would have you sitting on $64,606, $97,809, and $6,424,823.00 today.
Do you really care that you can't touch what they make?
Again, I don't - and you shouldn't either, especially if you've got the risk management needed to ride the inevitable correction Stockman sees coming to the still-higher prices ahead.
Speaking of which...
3) You never want to believe a permabear (about anything): Listen to them, investigate their arguments... and then decide what you're going to do about it. But don't follow them blindly, because doing so means you miss out on growth, on profits, and on building a better future for you and your loved ones.
Sure, it's tempting to try to protect your money by sidestepping a potential market decline, but missing out on upside potential is always the far more expensive proposition.
In March 2013, Stockman wrote a piece for The New York Times called "Sundown in America," in which he noted that investors should head for the hills as fast as possible.
"If this sounds like advice to get out of the market and hide out in cash, it is," Stockman urged. I can only imagine that folks who aren't part of the Total Wealth and Money Map Report families did.
Since then, the Dow has skyrocketed, and investors are 51.58% richer for having gone along for the ride to nine record highs this year alone. Many have done considerably better, too.
In March 2015, he said the same thing, sagely observing that the United States was entering the "terminal phase" of the global financial system which would, to his way of thinking, end in total collapse.
No collapse in sight...
To be clear (and fair), the markets are due for a correction, but that's a different subject entirely. The current bull market is long overdue, but that doesn't mean one is imminent any more than it means a stock like Amazon is ripe for failure when millions of traders think it's filled with potential.
Speaking of which, let's talk about how to play what you now know - profitably...
First, get all this "false economy" stuff out of your head. It's correct, but it has nothing to do with how the company is valued... only why it's valuable.
Second, grab the tiger by the tail and hang on. Lots of people have their doubts about Amazon, and for years many have made the same arguments Stockman is making now. Yet, the company has kept growing and will continue to do so as it finds new ways to use the data at its disposal.
Stockman talks about physical inventions and delivery services when the Amazon cloud accounts for 89% of the company's operating profits. The company doesn't release data, but credible estimates from DeepField and Nextgov, among other sources, suggest that as much as 70% of Internet traffic worldwide goes through Amazon Web Services.
On average, as much as one-third of all daily Internet usage involved a site running on Amazon Web Services in 2012... when the company was a fraction of the size it is today.
If that's not inventing something "explosive," then I don't know what is.
And third, it's Amazon versus everybody else, which means you have a decision to make. You can side with Amazon and build upon what is arguably the greatest example of capitalism in recorded history - or you can end up with everybody else... left on the sidelines, fighting over peanuts.
Here's How to Play Amazon
I see three ways to participate. There are others, but these are the simplest given how expensive the stock is today at $991 a share:
- Buy a single Amazon share if you have to. That way you're "onboard" in percentage terms, even if the initial dollars invested are small (to start).
- Buy Amazon via a mutual fund where you'll get more leverage as part of a bigger fund. While that gives you access to Team Bezos, understand that this isn't necessarily a pure play because there will be other companies in the mix. One mutual fund, in particular - the T. Rowe Price Blue Chip Growth (TRBCX) Fund - boasts Amazon as its largest holding. In fact, it's among a set of programs that give investors the opportunity to earn aggressive monthly income combined with huge lump-sum payouts - potentially $2,000, $5,000, or even more every month for the rest of your life. [Click here to "Enroll"]
- Buy long-dated Amazon LEAPS options that closely approximate the underlying stock's performance but at a fraction of the expense. LEAPS, in case you're not familiar with the term, stands for Long-Term Equity Anticipation Securities. They're a relatively recent development, dating back to 1990, and can give you as much as a two-year window to let the trade play out.
In all three cases, use appropriate risk management - meaning trailing stops, position sizing, and even lowball orders - as a means of maximizing your potential while sidestepping calamity if the markets have other ideas.
At the end of the day, understand this:
The markets may correct, and Amazon may yet fall for the very reasons Stockman's cited. Whether he's right or I am is immaterial.
My job is to make sure you've had the opportunity to grab every last penny of profit potential you can in the meantime.
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