Jeff Bezos laughing above as he realizes that his exit stage left was literally followed by a bear.
The Federal Reserve is trying very, very hard to push your stocks lower.
We might add that they are succeeding. That reality bit hardest when the results of Amazon.com Inc. (NASDAQ:AMZN) came through.
That one-day drop knocked out $200 billion of value and made investors come to grips with reality. We want to focus on these results, though, to show why we are seeing so many fallen angels all around us.
Amazon: Getting Everything Wrong In One Quarter
Let us quickly list the things AMZN got wrong.
1) Operating cash flow decreased by about 40% year over year.
That does not sound like a growth stock, but maybe things get better down the report.
2) Cash flow was an outflow of $18.6 billion versus an inflow of $29.4 billion for the trailing 12 months.
A $48 billion delta in the wrong direction.
3) Financing was done partly via issuance of about 4 million shares or $10 billion worth of AMZN.
$40 billion annualized run rate exceeds the market capitalization of 300 out of 500 S&P 500 companies. So no buyback for you at least.
4) Net sales increased 7% to $116.4 billion in the first quarter, compared with $108.5 billion in first quarter 2021.
Excluding AWS, sales grew at about 3%, less than half the run rate of inflation.
5) Operating income was negative for the whole ex-AWS segment.
What This Means For AMZN
For the longest time in AMZN’s history, nobody cared about profits. The profits will come when they come was the mantra. Then suddenly AMZN delivered strong profits at the beginning of the pandemic and got everyone enthused that their thesis was playing out. The reversal speaks volumes about how bad the business model is. In the absence of AWS financing this experiment and the market giving AMZN a zero effective cost of equity, the company would have probably gone under a long time back. But in the reality we live in, AMZN is exempt for making money as that is purely the obligation of retailers like Walmart Inc. (WMT) and Target Inc. (TGT). Of course, if you want the expectations of profits, there is always that one analyst who will tell you that the stock is very cheap on 2031 earnings.
If you ever pray for something, pray for the confidence of that analyst. We say that because just in the last few days, analysts have had to admit that they have zero real visibility into AMZN’s next two quarters.
Yet, we can forecast out to 2031, down to the penny.
What This Means For All Your Growth Investments
In our recent article on iShares Russell 1000 Growth ETF (IWF), we told 3 ways that this bubble is actually worse than the dot com boom. AMZN, the prototypical growth stock of today, is struggling to deliver anything that remotely looks like growth when the whole company is considered. At some point valuations revert to the mean, and these results are likely to be the catalyst. Stock markets historically have been huge haters of inflation. In normal times with inflation under 4%, the average 10-year PE (CAPE) ratio is 18-20. When inflation goes past 4% but stays under 8% it is 13-15. When inflation moves > 8%, CAPE 10 goes to 10.
Current CAPE ratio is over 30, and inflation is over 8%, so curb your enthusiasm in buying these dips. Growth stocks have a long way down and a long way to fall versus value.
Why The Federal Reserve Won’t Bail You Out
The Federal Reserve is still hopelessly behind the curve. To their credit they have realized that the only way out is to actually rupture the asset bubble. Read that “asset bubble” as companies which were aiming for profitability in the later part your grandchildren’s lives. This asset bubble rupture should decrease consumption and increase supply of labor (# no early retirements). Last time when AMZN’s super bubble burst, the Federal Reserve had eased aggressively.
We don’t see any prospects for that this time and certainly there is far less room to ease compared to what was done there. So if AMZN dropped 92%, then don’t be surprised if we get at least a 50% drop this time.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.