A reader reminds me that three years ago, I wrote,
I’ve got $100 that says the market cap of Amazon is lower on July 31, 2020 than it is today.
Spectacularly wrong. Since then, Amazon revenue has roughly doubled and its profits and market cap have roughly tripled. (As I read charts. I could be mis-reading them. Check me.)
The P/E ratio for Amazon has stayed at roughly 150. If it had fallen below 50, I would have won my bet, despite the growth in revenue and profits at Amazon.
At some point, the P/E ratio has to come down to earth. I lost my bet because this has not yet happened.
Right now, Amazon is well on the way to swallow all of retail. Interestingly enough, they are also on the path (unnoticed by most) to potentially swallow campaign finance and non-profit finance. They run the AWS platform which provides sophisticated websites their systems. They also have the smile platform which essentially turns donation into a personally directed salestax that can be imposed systematically and transparently. ACTBLUE has served as the … clearinghouse? moneylaundering? for the BLM donations [to be totally clear – I’m not here arguing that the Democrats are siphoning the money away from the ‘movement’ or using it to cover their overhead or drive their campaign support lists, etc; whether that is true or not. I’m only arguing that, as the Democrats say, they are providing an online platform for processing the donations). If Amazon is able to be a more effective platform for this kind of funding, tying it to purchases and sliding pricing delicately to enhance donation… that would be game changing, better than the ‘would you like to donate $1 to the campaigns’ from your tax returns, similar in nature but more like $1 every single day… or $3… turning each person into a current top %2 donor or something similar and spreading it across all the interconnected causes.
So I’m not sure that Amazon needs to fall to earth, so to speak. They have a long way to go and some of their ‘earnings’ may never make it to the balance sheet.
You just failed to follow one of the fundamental rules of forecasting. Say what will happend but not when or say when something will happen but not what. However, your last sentence demonstrates that you now know the rule and are following it.
There is a 40% chance that Arnold will fail to follow this rule.
The kind of forecasting most care about is the kind with an actionable timeline (with actionable mostly meaning “investible and you won’t go broke before things turn”).
A good opportunity to revisit a 2009 Kling/Schultz piece:
“The housing bubble that finally burst last year was pumped up by at least three forces: new technology, media and industry hype, and, most consequentially, government planning. Without these three there is no way the housing bubble could have grown so large.
When the dot-com bubble burst in 2000, our government geniuses “solved” the problem of the resulting recession by creating a housing bubble. Now that this plan has exploded to disastrous effect, the planners have come up with their next great project–creating a “green” economy.
Let the unique power of the market to experiment through trial and
error and to sort and filter innovations proceed without meddling.”
https://www.aei.org/articles/planning-the-next-bubble/
We now have both the predicted green tech bubble inflated by subsidies and government diktat as well as a dot.com v.2 bubble inflated by the 33% increase in M1 (the most liquid portions of the money supply) in the last 12 months.
His timing may have been off, but unlike so many others, he recognizes the tech bubble. And we hear even less about the green bubble: https://www.telegraph.co.uk/technology/2020/07/22/teslas-green-investment-bubble-burst/?via=indexdotco
Predicting when P/E returns to Earth is difficult but much less important than attempting to finding ways to act now to limit the eventual damage. Seeing that Romney and Collins oppose her, one cannot help but think that perhaps the gold standard advocated by Fed nominee Judy Shelton is the best way forward.
“The P/E ratio for Amazon has stayed at roughly 150. If it had fallen below 50, I would have won my bet, despite the growth in revenue and profits at Amazon.”
1 put options contract for July 2021 expiration with a strike of roughly half of Fridays close will cost you ~$2,900. If Amazon’s stock price decreased by 2/3rds in that span then that option would be worth ~$53,500. If you are high confidence that AMZN p/e ratios will eventually come back to earth rolling puts like this every ~6 months would have a very high expected return.
OT, my apologies: You recently said that both parties have thrown libertarians under the bus. My question is what are the minimum things Republicans would have to do to, or commitments they would have to make, to change this judgement?
This is not a trap, but you can already see how they would object and try to shift blame, which is to say that the libertarians are actually upset with American democracy or the American people, and the party has little choice but to grudgingly toss some treasures off the sinking ship if they are to win elections .
It seems that the issues that really matter to self-described libertarians, and that are the biggest cause of their dissatisfaction with the Republicans, are trade and immigration. In the end, what they really care about are cheap imports, open borders and low wages. In their view, that’s what the American Revolution was fought for.
It is hilarious that the libertarians gripe that the Republicans have “thrown them under the bus” (to use the nonsensical idiom that has unfortunately become ubiquitous). The libertarians are a laughably small voting bloc, but demand that the Republicans jettison the white middle and working classes – which are precisely the GOP’s only hope for winning elections. The libertarians have plenty of pity for themselves over their lack of political influence, but none for the real-life problems faced by voters who do not have Ph.D.s in economics.
“Thrown under the bus” is ambiguous, so I’ll let Kling define what he means for himself.
Libertarians always gripe about Republican politicians, just like the far left always gripes about mainstream Democrats. The Reagan who was the most libertarian President possible, of “A Time For Choosing”, who campaigned for Goldwater, of this 60 Minutes interview and a July 1 interview with Reason in 1975, who had Burnham, Niskanen and Henderson on the CEA (ok, also Paul Krugman and Larry Summers and David Romer), was *eviscerated* by most mainstream, high-status libertarian public intellectuals when they wrote their retrospectives of his two terms when he left office.
Cato and David Boaz came out with “Assessing the Reagan Years”, and they came down on him like a ton of bricks. (Part of that might be because David Koch ran for VP in 1980). The piled on even though they knew he was taking on the Soviets, and had to deal with a House that was 60% Democrats and a sizable contingent of liberal Northeast Republicans (back when there were Republicans in that part of the country) and a bare Senate majority that couldn’t beat a filibuster and which went left in his last 2 years which is why it voted against Bork 58-42. Rothbard went off on Reagan too.
I think they also felt like they were thrown under the bus, and I don’t question the principled nature of their criticisms, but from the 32 years of water under the bridge later, it looks like they didn’t know how good they had it. Principles are different from realism about votes in a democracy that already two generations post-New Deal and perspective about how much worse things could get. For example, how bad they are right now.
There may have been genuine ideological purism behind libertarians like Rothbard souring on Reagan back in the 1980s. In more recent years, however, I get the sense that the people calling themselves “libertarians” (what constitutes “libertarianism” is rather difficult to pin down) have far more in common culturally with progressives than with most Republican voters and, since the Iraq war, generally have been looking for excuses not to support Republican candidates. Their big gripes about Republicans (at least since social issues have almost all become moot) appear to be trade and immigration (and sometimes foreign policy), on which issues the “libertarian” position (and emotions) are very close to those of the Establishment Progressive Left. They don’t really mind “cancel culture,” since the cancelling is almost always done by private sector actors.
The libertarians know their agenda is not going anywhere, so I guess they might as well follow their “heart” (such as it is) in their political behavior. The cheap imports from China and the low wages resulting from immigration will provide some consolation to them for the otherwise total wreckage of anything resembling limited government.
Oh, and how could I forget – the libertarians of today share with the Establishment Left a perverse hostility to effective law enforcement, as was evident from the Koch brothers strong-arming the Republicans and Trump into joining with the Dems to enact “prison reform.”
I think Amazon’s stock price is looking at the company as having huge growth potential still. I put together a handful of the biggest retailers and their revenue growth was 15% over the last 5 years (profits 47%) while Amazon’s was 215% (profit was negative 5 years ago and today is almost at Walmart’s level).
So my take is that at today’s level Amazon is a better version of walmart but if they can keep expanding inventively their potential in 5 years is huge.
Must be a much, much, much better version of Walmart since the p/e on their shares is only about 25.
Isn’t Amazon like Microsoft? At the moment isn’t their big growth in profits from their cloud services? I don’t understand well many of these large companies and their growth but in both cases, companies with only slowly growing profits managed to find growth in a different area — in this case, cloud services. It’s much like the period when GM wasn’t making much from cars but was rising due to its financial services.
Having said that, Amazon has really been on an amazing tear with real innovation and focus.
What i would suggest is that looking at the P/E is not as good as examining the cash flow from operations and actual and free cash flow potential. AMZN has the ability to generate tons of FCF cutting back capex or at some future date when capex spending recedes due a closer or at maturity business.
So long as investors see the cash flow from operations increasing significantly year over year with non financial metrics indicating growth still likely there will be more appreciation ahead. I would suggest the intrinsic value of AMZN to be around 3,500. The Company has an ROI of over 20%
You lost the bet for the same reason you (so far? possibly always?) wrongly believe that the US budget deficit is “too high”.
Historically, high deficits lead to monetization of the debt lead to general inflation.
Today, instead of milk & bread & clothes inflation, we have asset inflation.
House prices go up, stocks & financial assets go up – but worker food & clothing costs do not.
Maybe we are even starting to have HYPER asset inflation.
Apple broke the $2 trillion market cap barrier, only a few years after breaking the $1 trillion barrier.
How many trillions of budget deficit printed money will it take for all of Amazon, Apple, Facebook, Google & Microsoft to be multi-trillion dollar market cap companies?
“This time is different”. So far never really has been.
But I’m pretty sure,
THIS “this time is different” really will be different.
We are starting the never-before seen Hyper Inflation of (rich folk) Assets: Hyper Asset Inflation.
What are the brakes on this kind of inflation? Why can’t Amazon and Apple become $10 trillion market cap companies?
Without riots over expensive bread – tho riots are there.