AMAZON dot CON: The Con Job Strikes Again
by Dave Kranzler, Investment Research Dynamics
Regarding AMZN AWS Services business: Another thing that will pummel them simultaneously is analogous to what happened to Sun Microsystems which I remember my CTO predicting before they crashed. Sun Microsystems stock was on a tear during the tech bubble but they sold a ton of equipment to venture backed startups. As that unwound, there stock was destroyed. – see below
I watched in sheer horror as Amazon’s stock price soared straight up 80 points after it released its Q2 earnings today, up 17% from its NYSE closing price. CEO Jeff Bezos’ net worth jumped $7 billion after his highly misleading earnings announcement.
The headlines reported that AMZN’s sales were up 20% year over year for Q2 and that net income had swung from a loss of $123mm to a profit of $92 million yr/yr for Q2. While those numbers are what they are, sales growth from Q1 to Q2 was a mere 2.9% – pretty much in-line with the rate of inflation.
The media propagandists attributed AMZN’s highly “surprising” quarter to big gains in its AWS business segment, which is its cloud-computing business. However, if we drill down into the numbers made available in its 8-K, we find that the AWS segment represents just 7.7% of AMZN’s revenue stream vs. 6.6% of revenues in Q1. Sure seems like a lot of manic hype over well less than 10% of AMZN’s business model.
As it turns out, AMZN’s AWS business model, like everything else it does, is seeded in low quality sources of revenue that will ultimately prove to be unsustainable. Why? See this comment sent to me by someone who read my Amazon research report and who used to specialize in high tech accounting for Silicon Valley start-ups:
I audited many of the high fliers that crashed and burned, took companies public & was at the printers the day the bubble really burst which ultimately tabled that IPO…Amazon Web Services is growing by leaps and bounds and a significant amount of those $’s are coming from venture backed start-ups. Almost the entire Silicon Valley and other startups outside the Valley use AWS. Venture backed startups have exploded just as AWS revenues have exploded…That segment of their business will get walloped which right now seems to be a main source of their operating income.
As many of you are aware, private equity capital has fueled an unprecedented tech bubble in Silicon Valley. Companies with no revenue are infused with printed money at multi-billion capitalization rates – hundreds of them. They all use cloud-computing services provided by companies like AMZN because it’s so cheap relative to building and maintaining an independent, secure system of servers and storage, which is what large established companies do for obvious reasons. Most of these companies spending money on services like AMZN’s AWS segment will eventually flame out. It may not happen until the stock market bubble bursts, but it will happen. And AMZN’s over-hyped business segment representing less than 10% of its revenue stream will flame out.
I have a lot more work to do drilling down into AMZN’s financials in order to wipe away the brown stuff flying at us from Wall Street and Bezos. I need to wait for the Company’s 10-Q in order to do that. I will be producing an update to my research report that will be made available to anyone who has previously purchased the report.
After the update is released, the price of the report will be raised for new buyers. This is because the report will contain some significant analytic enhancements, a couple of which were made aware to me by the accounting professional above. It’s significant accounting manipulation that is well-disguised. You can access the original report here: AMAZONdotCON.
But for now, here’s a few financial facts from AMZN’s quarter which show that AMZN’s headline numbers were misleading and much more hype than substance: AMZN’s cash has dropped $4.3 billion, or 30% since 12/31/14; while AMZN is touting its “non-GAAP free cash flow” metric, actual cash provided by operations per the cash flow statement in the 8-K was significantly lower at $1.9 billion; AMZN’s cash interest paid on long term debt increased 490% yr/yr for Q2, from $31 million in Q2 2014 to $152 million in Q2 2015 (didn’t hear Bezos mention that today…); AMZN’s SG&A expense increased 26% yr/yr for Q2 – at a greater rate than sales growth (my bet is they moved some “fulfillment” costs into SG&A in order to make it appear as if the cost of fulfillment decreased as a % of revenues.
There are a several other ways in which AMZN uses highly misleading accounting techniques to dress up its GAAP financial presentation. As I detail in my stock report – AmazonDotCon – the most absurd and misleading metric AMZN touts is its “free cash flow” number. Buried in the footnotes of its 10-K is a disclosure in which AMZN admits in so many words that the number is essentially b.s.
While the extreme market intervention by the Fed and the U.S. Treasury’s Exchange Stabilization Fund have made it extremely hazardous to short ANY stock right now, the flip-side is that they have blown a stock market bubble that is bigger than any previous bubble in the history of this country. While it’s impossible to time the top, fortunes will be made by people who can position themselves short in stocks like AMZN ahead of the drop that’s eventually going to hit our system.
From January 1999 to the bottom of the tech crash, AMZN dropped from $113 to $5.51 – a 95% drop. We can expect an eventual plunge of similar magnitude this time around. I am certain of that. The only question is timing.